Investors Title Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless noted. Investors Title primarily underwrites title insurance through its insurance subsidiaries; title insurance generated 95.8% of company revenue in Q1 2017. The quarter is seasonally slower for real estate activity, and results are not necessarily indicative of the full year.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $37.8 million | $24.9 million; up 52.1% |
| Net premiums written | $33.6 million | $21.5 million; up 56.4% |
| Income before income taxes | $6.45 million | $2.58 million |
| Net income attributable to the Company | $4.48 million | $1.81 million; up 146.7% |
| Diluted earnings per share | $2.36 | $0.93 |
| Cash dividends per common share | $0.20 | $0.16 |
| Operating cash flow | $2.41 million | $1.54 million |
| Cash and cash equivalents at quarter-end | $25.7 million | $27.9 million at December 31, 2016 |
| Total assets / stockholders’ equity at quarter-end | $233.2 million / $160.3 million | $228.9 million / $155.1 million at December 31, 2016 |
Operating expenses rose 40.7% to $31.35 million. Management reported an after-tax profit margin of 11.8%, compared with 7.3% a year earlier. The filing reports no debt balance at March 31, 2017; the $6 million bank loan used in part to finance the 2016 University Title acquisition was repaid in December 2016.
Quarter-end investments totaled $165.7 million, including $13.6 million of short-term investments, $98.4 million of fixed maturities, and $43.1 million of equity securities. Cash plus short-term investments totaled approximately $39.4 million. Operating and financing cash flows were more than offset by investing outflows of $4.23 million, including purchases of short-term investments and property; cash declined $2.21 million during the quarter.
Material changes and management commentary
- Premium growth reflected revised North Carolina rates effective April 1, 2016 (management estimated a roughly $1.66 million positive Q1 2017 impact), higher home sales and property values, a purchase-transaction mix, and additional agents and activity in Texas and southeastern markets. Home and branch premiums increased 72.8%; agency premiums increased 50.8%.
- Other revenue increased to $2.96 million from $2.05 million, primarily from title fees and earnings of unconsolidated affiliates. Investment income declined to $1.10 million from $1.15 million, attributed to a lower level of fixed-income investments.
- Claims provision increased to $719,000 from $16,000, or 2.1% of net premiums versus 0.1%. Management attributed the comparison mainly to favorable claims experience in the prior-year quarter; the higher provision represented approximately $694,000 more than applying the prior-year provision rate. Claims reserves were $35.45 million, of which 87.2% was incurred but not reported. Management considers reserves adequate, but estimates may change materially as experience develops.
- The company recorded $1.04 million of other comprehensive income, principally reflecting unrealized investment gains. It recorded no other-than-temporary investment impairment in Q1 2017, compared with $42,794 in Q1 2016.
- The October 2016 University Title acquisition added a Texas agency. Identifiable intangible assets were $7.67 million net at quarter-end; management reported no impairment indicators for the related intangible assets, goodwill, or title plant.
Outlook, risks, and contingencies
The company provided no specific company revenue or earnings guidance. Management said operating results depend heavily on real estate transactions, mortgage lending and refinancing, interest rates, and regional conditions; the business is cyclical and seasonal. Citing the MBA’s March 2017 forecast—not company guidance—the filing noted projected 2017 purchase activity growth of 11.5%, refinance activity decline of 45.0%, and total mortgage originations decline of 15.4% versus 2016. Management also described expectations for gradual Federal Reserve rate increases and noted that higher rates could dampen refinancing activity.
- Key risks include real-estate and mortgage-market downturns, claims and reserve estimation, investment-market and interest-rate movements, competition, regulatory or rate changes, concentration in North Carolina and Texas, ratings changes, technology and cybersecurity issues, and limits on insurance-subsidiary dividends.
- Legal proceedings and regulatory audits were described as incidental; management did not expect them to have a material effect. The company remains contingently responsible for customer escrow and trust deposits and exchange transactions. Like-kind exchange deposits and reverse-exchange property totaled approximately $186.1 million at March 31, 2017, down from $202.2 million at year-end; these are excluded from the balance sheet.
- Potential loss on the company’s variable-interest investments was capped at its total investment commitments, reported as $18.1 million. The company stated that it had no material off-balance-sheet financing arrangements beyond disclosed customer-related obligations and ordinary commitments.
- Management said funds from operations should meet operating needs for the foreseeable future, while noting that real-estate conditions, claims, investment results, regulation, and acquisition opportunities could affect liquidity and capital needs. Planned capital projects include technology and systems investment.
Important facts for investors to verify
- How much of premium growth reflects sustainable transaction and geographic expansion versus the estimated $1.66 million North Carolina rate benefit.
- Whether the elevated claims provision and reserve levels remain adequate as claims experience develops, particularly the large incurred-but-not-reported component.
- Whether growth in operating cash flow continues, given that Q1 cash declined and investing activity used $4.23 million.
- How changes in mortgage rates, home sales, refinancing, and North Carolina and Texas market conditions affect future premiums and margins.
- Potential exposure from the $186.1 million of customer exchange-related deposits and property, and the company’s $18.1 million maximum potential loss on variable-interest investments.