Investors Title Company — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Investors Title is a holding company whose principal business is title insurance; title insurance represented 95.4% of revenue for the first nine months. Results are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $29.51 million | $33.61 million | $91.18 million | $94.15 million |
| Net premiums written | $26.36 million | $30.43 million | $81.12 million | $84.79 million |
| Income before tax | $3.60 million | $8.28 million | $9.63 million | $18.90 million |
| Net income attributable to company | $2.59 million | $5.52 million | $6.95 million | $12.90 million |
| Diluted EPS | $1.28 | $2.66 | $3.41 | $6.19 |
| Operating cash flow | Not separately provided | Not separately provided | $4.85 million | $13.35 million |
Revenue fell about 12% in Q3 and 3% year to date; company-attributable net income declined about 53% and 46%, respectively. Management reported after-tax profit margins of 8.8% for Q3 and 7.6% year to date, versus 16.4% and 13.7% in 2013. Dividends were $0.08 per share in Q3 and $0.24 year to date, unchanged from the comparable periods.
At September 30, cash and cash equivalents were $23.62 million, short-term investments $6.15 million, and total investments $146.56 million. Total assets were $195.50 million; total liabilities were $60.83 million and equity was $134.67 million. The balance sheet presents no borrowings as a separate debt line item. The filing reports no material change in market risk and no use of derivatives to hedge interest-rate risk.
Drivers and material changes
- Title orders fell 17.5% year to date, primarily because of lower refinance activity. Management cited a higher share of purchase transactions, which typically carry higher premiums than refinance transactions.
- Q3 premiums written declined 13.4%; agency premiums fell 17.9%, including an approximately $2 million reduction in estimated unreported agency premiums. Year-to-date premiums declined 4.3%; Texas premiums increased, while most other listed states declined.
- Operating expenses rose 2.3% in Q3 and 8.4% year to date. The key comparison was claims: 2014 included provisions of $1.51 million for Q3 and $4.18 million year to date, versus benefits of $3.04 million and $2.43 million in 2013. The prior-year benefits reflected reserve estimate reductions after improved claims experience.
- Operating cash flow fell to $4.85 million from $13.35 million year to date, reflecting lower earnings, payment timing, lower deferred tax expense and higher claim payments, partly offset by higher claims provision. Cash and cash equivalents were nearly unchanged from year-end.
- Investors Title purchased the remaining 30% of United Title Agency in May 2014 for $515,275, making it wholly owned. The previously recorded contingent acquisition consideration was fully paid during 2014.
Outlook, risks and contingencies
- The company gave no specific earnings or revenue guidance. Management said operating results depend heavily on cyclical real-estate sales and mortgage activity, including refinancing, interest rates and mortgage-credit availability; seasonality also affects results.
- Management cited an industry MBA forecast for lower 2014 mortgage originations, purchase activity and refinancing than in 2013. These are external forecasts, not company guidance. It also noted uncertainty around mortgage regulation, CFPB disclosure changes scheduled for August 2015, and possible Fannie Mae and Freddie Mac reform.
- Management believes operating cash generation and liquid investments are sufficient for foreseeable needs, while noting that future cash generation and subsidiary dividends depend on claims, markets, ratings and insurance regulation. Capital needs include operations, taxes, technology investment, dividends and potential share repurchases.
- Claims reserves were $36.25 million, including $30.91 million for incurred-but-not-reported claims. Management considers reserves adequate but says estimates may change materially as experience develops.
- Approximately $106.48 million of like-kind exchange deposits and reverse-exchange property were held off balance sheet at September 30, versus $76.04 million at year-end. The company is contingently liable for their proper disposition. Customer escrow and trust deposits are also excluded from assets, with contingent obligations.
- Routine legal proceedings and regulatory inquiries were not expected by management to have a material effect. The filing identifies risks including real-estate market weakness, reserve inadequacy, investment-market changes, regulation, competition, geographic concentration in North Carolina and Texas, and technology or cybersecurity issues.
- The filing corrected a 2013 cash-flow classification: $938,090 of excess tax benefits was moved from operating to financing activities, with no effect on earnings, balance sheets or total cash. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether title orders, premiums and refinancing activity stabilize, and how purchase-versus-refinance mix affects premium revenue.
- Whether claims experience supports the $36.25 million reserve and whether further reserve adjustments affect earnings.
- Whether operating cash flow recovers and whether the sizable off-balance-sheet exchange balances create any material operational or liquidity exposure.
- How mortgage disclosure and other regulatory changes, as well as Fannie Mae and Freddie Mac developments, affect agent operations and title-insurance demand.
- Whether investment valuations and market-sensitive unrealized gains remain supportable, particularly for the auction-rate securities valued using unobservable inputs.