Investors Title Company — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited consolidated results cover the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. The company primarily underwrites title insurance; title insurance represented 95.5% of revenue in the first half. Results are sensitive to real estate transactions, mortgage and refinance activity, claims experience, and investment markets.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $33.22 million | $33.69 million | $61.68 million | $60.54 million |
| Income before taxes | $4.68 million | $5.87 million | $6.04 million | $10.62 million |
| Net income attributable to Investors Title | $3.37 million | $4.01 million | $4.36 million | $7.38 million |
| Diluted earnings per share | $1.65 | $1.92 | $2.14 | $3.54 |
| Operating cash flow | Not separately stated | Not separately stated | $(0.61) million | $4.79 million |
- Q2 revenue decreased about 1.4% year over year, while company-attributable net income fell about 15.8%. First-half revenue rose about 1.9%, but attributable net income declined about 40.9%.
- First-half operating expenses rose 11.5%, to $55.64 million, largely reflecting higher agent commissions and claims provision. Reported combined after-tax profit margins were 10.2% in Q2 and 7.1% for the first half, versus 11.9% and 12.2%, respectively, in 2013.
- Net premiums written were $29.85 million for Q2 and $54.76 million for the first half. First-half title orders fell 19.4% to 99,126, mainly due to lower refinance activity. Texas premiums increased substantially, while premiums declined in several other states, including North Carolina.
- Investment income increased to $2.07 million for the first half from $1.85 million. Net realized investment gains were $584,219, compared with $71,616 in 2013; 2014 included gains on investment and other asset sales, partly offset by impairment charges.
- Cash and cash equivalents were $19.50 million at June 30, down from $23.63 million at year-end. Total investments were $146.82 million; total assets were $191.25 million and stockholders’ equity was $132.90 million. The balance sheet reports no borrowings or other interest-bearing debt; liabilities were primarily claims reserves, accrued liabilities, and deferred taxes.
- Cash declined by $4.12 million in the first half. Investing activities used $2.48 million and financing activities used $1.03 million. The company paid $0.16 per share in dividends during the half.
Changes, outlook, risks, and unusual items
- The first-half claims provision increased to $2.67 million from $0.61 million in 2013; management attributed much of the comparison to unusually high favorable claims development in the prior-year period. Q2 provision declined year over year, reflecting favorable experience in recent policy years. Claims reserves totaled $35.63 million, including $30.66 million for incurred-but-not-reported claims; management cautioned that reserve adjustments may be significant.
- Management said operating cash flows and investment income are expected to meet current needs, but noted that future liquidity depends on real estate conditions, claims-paying ability, and financial strength ratings. No company-specific earnings or revenue guidance was provided.
- Management cited an industry forecast for lower 2014 mortgage originations and refinancing, alongside higher expected mortgage rates. It also identified potential effects from housing-market cycles, regulation, government-sponsored enterprise reform, competition, market-rate changes, technology risks, and concentration in North Carolina and Texas.
- On May 21, 2014, the company acquired the remaining 30% interest in United Title Agency for $515,275, making it wholly owned. It also paid the remaining $341,250 contingent purchase consideration during Q2.
- The company was dismissed with prejudice in July 2014 from the Michigan transfer-tax class action. Management said other routine legal proceedings and regulatory inquiries were not expected to have a material effect.
- Like-kind exchange deposits and reverse-exchange property held for customers were approximately $90.57 million, excluded from the balance sheet; the company remains contingently liable for their disposition. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the decline in title orders and refinancing is offset by purchase activity, particularly growth in Texas.
- How claims development and the $35.63 million reserve evolve, including the large incurred-but-not-reported component.
- Whether lower first-half earnings and negative operating cash flow persist, and the effect of investment gains on reported results.
- Liquidity available at the holding-company level, including regulatory limits on subsidiary dividends and the planned use of cash for capital spending, dividends, and repurchases.
- Potential operating and compliance costs from mortgage-disclosure rules taking effect in August 2015, and any material developments in regulatory or legal matters.