Investors Title Company — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2013; financial statements are unaudited and consolidated. The company primarily underwrites title insurance through Investors Title Insurance Company and National Investors Title Insurance Company. Title insurance represented 96.3% of insurance and other services revenue for the first nine months.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $33.6 million, up 4.1% | $94.1 million, up 16.6% |
| Net income attributable to the company | $5.5 million, up 74.7% | $12.9 million, up 62.4% |
| Diluted EPS | $2.66, versus $1.50 | $6.19, versus $3.74 |
| After-tax profit margin | 16.4%, versus 9.8% | 13.7%, versus 9.8% |
| Net premiums written | $30.4 million, up 4.9% | $84.8 million, up 17.9% |
For the nine months, operating cash flow was $14.3 million, compared with $5.8 million a year earlier. Investing activities used $9.9 million and financing activities used $2.3 million; cash increased $2.1 million to $22.9 million. Cash and short-term investments totaled $38.3 million at September 30.
At September 30, total assets were $189.2 million, total liabilities $61.4 million, and stockholders’ equity $127.2 million. Investments totaled $142.3 million, including $86.1 million of fixed maturities and $33.5 million of equity securities. The balance sheet does not list a material borrowing balance; liabilities primarily comprise claims reserves, accrued liabilities, and deferred taxes.
Material changes versus the prior comparable period
- Premium growth reflected more purchase transactions and higher average home values. Title orders rose 4.6% year to date to 184,448; purchase transactions generally carry higher premiums than refinances.
- Claims expense shifted to a benefit of $3.0 million in the quarter and $2.4 million year to date, versus provisions of $2.4 million and $4.4 million, respectively, in 2012. The company reduced its claims reserve by approximately $2.4 million after revising actuarial inputs; management estimates this lifted quarterly net income by $1.6 million, or about $0.76 per share.
- Commissions and salaries rose with business activity and staffing. Year-to-date operating expenses increased 8.3%, less than revenue growth.
- Available-for-sale investment values rose: total investments increased to $142.3 million from $130.8 million at year-end 2012. Unrealized losses on securities were $623,000 at September 30, versus $116,000 at year-end; management considered them temporary.
Outlook, commentary, risks, and unusual items
The company gave no specific company earnings or revenue guidance. Management said internally generated funds and liquid investments should meet foreseeable operating needs, while noting results depend on real estate activity, interest rates, claims experience, and subsidiary dividend restrictions. Management cited an industry forecast for declining 2013 mortgage originations and refinancing as rates rise, partly offset by stronger purchase activity and home sales.
- The claims-reserve estimate is inherently uncertain and may require significant adjustment as claims develop. The third-quarter actuarial change was a material earnings benefit, so reported earnings should be considered alongside results excluding that estimate change.
- Business risks include housing and mortgage-market cyclicality, interest-rate and investment-market changes, potential reserve inadequacy or fraud losses, regulatory scrutiny, competition, and geographic concentration. North Carolina accounted for approximately 30.1% of net premiums written.
- New CFPB mortgage rules effective January 2014 could affect lending activity; heightened scrutiny of settlement providers may also affect agents. Management noted uncertainty around regulatory proposals and possible further federal shutdowns.
- Escrow and like-kind exchange funds/property of approximately $60.4 million were excluded from the balance sheet, but the company remains contingently liable for their disposition and related obligations.
- Legal proceedings and regulatory inquiries were not expected by management to have a material financial impact. The company reported effective disclosure controls and no material change in internal controls.
Most important facts for investors to verify
- How much of the earnings increase is sustainable after the $2.4 million claims-reserve estimate reduction and favorable prior-year claims development.
- Whether purchase activity and premium growth can offset weakening refinancing volumes and higher interest rates.
- Subsequent claims emergence and the adequacy of the $34.8 million claims reserve, particularly the $30.3 million IBNR portion.
- Investment portfolio exposure to market-rate changes, unrealized losses, and valuation uncertainty in auction-rate securities.
- Potential cash demands or regulatory constraints related to the $60.4 million of exchange activity, subsidiary dividends, and planned share repurchases.