Investors Title Company — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods unless otherwise noted. The company primarily underwrites title insurance, with title insurance representing 94.3% of first-half revenue.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $33.83 million | $35.48 million | $58.69 million | $63.78 million |
| Net premiums written | $29.79 million | $30.46 million | $51.30 million | $55.43 million |
| Income before taxes | $6.54 million | $5.79 million | $9.13 million | $8.16 million |
| Net income attributable to the Company | $4.53 million | $4.12 million | $6.34 million | $5.85 million |
| Diluted EPS | $2.35 | $2.05 | $3.28 | $2.90 |
- Revenue declined 4.7% in Q2 and 8.0% for the first half; premiums written fell 2.2% and 7.4%, respectively.
- Despite lower revenue, Company-attributable net income rose about 9.9% in Q2 and 8.5% for the first half. Management attributed lower operating expenses mainly to reduced agent commissions and claims provision. After-tax margins were 13.4% for Q2 and 10.8% for the first half, versus 11.6% and 9.2% in 2015.
- First-half operating cash flow was $5.55 million, up from $4.54 million. Investing activities used $1.00 million and financing activities used $3.72 million. Cash and equivalents ended the period at $22.62 million.
- At June 30, total assets were $213.56 million, total liabilities $65.37 million, and stockholders’ equity $148.19 million. The filing does not report borrowings; no debt balance is presented on the balance sheet. Cash, short-term investments, fixed maturities and equity securities totaled approximately $177.92 million.
- Claims reserves were $37.21 million, down from $37.79 million at year-end 2015. First-half dividends were $0.32 per share; the company repurchased 34,870 shares for $3.13 million.
Changes, outlook and risks
- North Carolina home-and-branch premiums increased, aided by new rates effective April 1, 2016, which management estimated added approximately $615,000 in Q2, and by increased purchase transactions. Agency premiums declined, particularly in Texas, partly reflecting the loss of business from an agent acquired by another insurer.
- Claims provision fell to $0.66 million for the first half from $2.92 million. Management cited favorable experience in recent policy years; the lower provision ratio represented approximately $2.04 million less in reserves than at the prior-year ratio. Claims estimates remain uncertain and may change materially as experience develops.
- Investment-related earnings were less favorable year over year: Q2 recorded a $14,828 realized loss versus a $925,164 gain in 2015; first-half gains were $135,002 versus $939,967. First-half 2016 included $115,238 of other-than-temporary impairment charges. Unrealized investment gains increased accumulated other comprehensive income.
- The company gave no specific company earnings or revenue guidance. Management expects operating cash flows to cover foreseeable needs, but results depend on real estate and mortgage activity, interest rates, claims, investment markets and regulatory developments. The filing cites an MBA forecast for 2016 purchase activity growth and lower refinancing activity; these are external forecasts, not company guidance.
- Key risks include cyclical real estate and mortgage volumes, concentration in North Carolina, potential claims-reserve inadequacy or fraud losses, investment-market losses, competition, regulation, technology and cybersecurity risks, and restrictions on dividends from insurance subsidiaries. Legal proceedings and regulatory inquiries were not expected by management to have a material consolidated impact.
- Off-balance-sheet customer funds include approximately $159.78 million of like-kind exchange deposits and reverse-exchange property. These are excluded from company assets, but the company remains contingently liable for their proper disposition and related obligations. Escrow and trust deposits also create contingent responsibilities.
Investor verification priorities
- Assess whether lower agency premiums, including Texas exposure, are offset by growth in home-and-branch business and the durability of North Carolina rate benefits.
- Review claims development and reserve assumptions: most reserves ($32.32 million) were for incurred-but-not-reported claims, and favorable recent experience materially reduced the current provision.
- Separate recurring operating performance from investment gains, impairments and market-driven changes in accumulated other comprehensive income.
- Monitor liquidity and capital allocation, including repurchases, dividends, planned technology capital spending and regulatory limits on subsidiary distributions.
- Evaluate exposure related to exchange and escrow funds, agent concentration, and the company’s sensitivity to real-estate volumes, interest rates and regulation.