Investors Title Company — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Investors Title is a holding company whose principal business is title insurance; it also provides exchange, trust and investment-management services.
Financial performance and liquidity
- Revenue: $126.3 million, up 9.7% from 2012. Net premiums written were $113.9 million, up 11.3%; title insurance represented 96.2% of insurance and other services revenue.
- Profit: Net income attributable to the Company was $14.7 million, up 32.5%; diluted EPS was $7.08 versus $5.24. Income before taxes was $21.5 million. The effective tax rate rose to 31.3% from 30.4%.
- Margins: Consolidated after-tax profit margin was 11.6%, compared with 9.6%. Title insurance after-tax margin increased to 13.0% from 10.4%.
- Cash flow: Operating cash flow was $16.3 million, versus $8.7 million. Cash and cash equivalents increased to $23.6 million from $20.8 million.
- Liquidity and capital: Short-term investments were $7.9 million; total investments were $142.8 million. Assets were $188.3 million and stockholders’ equity was $128.1 million. The supplied balance-sheet data presents no debt balance. Approximately $83.3 million of subsidiary net assets could not be transferred to the parent without regulatory approval.
- Claims and obligations: Claims reserves were $35.4 million, down from $39.1 million; 86.8% covered incurred-but-not-reported claims. The filing estimates $45.5 million of contractual obligations, including claims reserves. The Company paid $0.32 per share in dividends and repurchased $4.3 million of stock.
Changes versus comparable periods
- Premium growth primarily reflected more purchase transactions and higher home values; title order volume rose just 0.2% to 240,639. Agency net premiums increased 13.4%, while home and branch premiums rose 4.4%.
- Operating expenses increased 5.8%, slower than revenue growth. Agent commissions rose 13.0% and salaries and related costs rose 16.0%.
- The claims line shifted from a $6.1 million provision in 2012 to a $0.6 million benefit in 2013, reflecting favorable development and a change in reserve assumptions. Net realized investment gains fell to $0.2 million from $1.1 million; investment income declined to $3.9 million from $4.0 million.
- Fourth-quarter net income attributable to the Company was $1.8 million, versus $3.2 million in Q4 2012; diluted EPS was $0.88 versus $1.51. Q4 net premiums written were $29.1 million, slightly below $30.4 million a year earlier.
Outlook, risks and unusual items
- The filing provides no company-specific earnings or revenue guidance. Management cited an MBA forecast that 2014 mortgage originations would fall 36.4%, chiefly as refinancing was projected to decline 60.1%; purchase activity was forecast to increase 3.8%. Rising mortgage rates and weaker refinance volumes could pressure premiums.
- A third-quarter actuarial estimate change reduced claims reserves and claims expense by approximately $2.2 million, increasing 2013 net income by about $1.45 million, or $0.71 per basic share and $0.70 per diluted share. Management said the change reflected favorable recent claims experience; reserves remain inherently uncertain and claims may take more than 20 years to settle.
- Geographic concentration is material: North Carolina generated 27.4% and Texas 26.8% of 2013 title premiums. One agent accounted for 16.4% of net premiums written. Real-estate cycles, interest rates, claims severity, fraud, investment-market movements, regulation and competition are key risks.
- Management estimated that a 100-basis-point interest-rate increase would reduce fixed-income fair value by about $4.0 million; a 10% equity-market decline would reduce equity value by about $3.6 million. Cash deposits of $23.1 million were uninsured by the FDIC at year-end.
- A Michigan class action involving transfer-tax charges was pending; the Company said it would defend the case but could not estimate a potential loss range. A separate West Virginia rate-related class action was administratively closed in Q3 2013.
- The 2014 outlook figures are external forecasts cited by management, not Company guidance. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.
Important facts for investors to verify
- How much of 2013 earnings growth was attributable to the $2.2 million reserve-estimate change and favorable prior-year claims development, and whether that development persists.
- Whether 2014 purchase activity can offset the forecast contraction in refinancing and the resulting effect on premiums, margins and cash generation.
- Claims-reserve adequacy, including sensitivity to adverse loss-ratio changes; the filing estimates a three-percentage-point change would affect after-tax income by approximately $2.25 million.
- Exposure to North Carolina, Texas and the largest agent, alongside the status and potential impact of the Michigan litigation and regulatory changes.
- Investment portfolio valuation and liquidity, uninsured cash concentration, and regulatory limits on subsidiary distributions that may constrain parent-company dividends or repurchases.