Investors Title Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless stated otherwise. The company primarily underwrites title insurance, which generated 96.1% of insurance and other services revenue. Results are unaudited.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $26.85 million | $22.41 million; up 19.8% |
| Net premiums written | $23.93 million | $19.67 million; up 21.7% |
| Income before income taxes | $4.75 million | $1.95 million |
| Net income attributable to the Company | $3.38 million | $1.43 million; up approximately 135.8% |
| Basic / diluted earnings per share | $1.65 / $1.62 | $0.68 / $0.67 |
| Operating cash flow | $1.70 million provided | $0.71 million used |
After-tax profit margin was 12.6%, versus 6.4%. Operating expenses rose 8.0% to $22.10 million, slower than revenue growth. Investment income declined to $0.92 million from $0.98 million; net realized investment gain fell to $16,000 from $193,000. Cash dividends paid were $0.08 per common share, compared with $0.07.
At March 31, 2013, total assets were $174.14 million and stockholders’ equity was $119.50 million. Cash and cash equivalents were $20.50 million, short-term investments $19.84 million, and total investments $135.09 million. Claims reserves were $38.31 million, down from $39.08 million at year-end. The balance sheet presents no debt line item; the filing does not provide a clear consolidated debt total. Cash and short-term investments together were approximately $40.34 million.
Material changes and management commentary
- Title orders increased 6.6% to 57,803. Management attributed premium growth primarily to increased purchase activity, as well as premium-rate changes in certain markets. Agency premiums grew 22.2%; home and branch premiums grew 19.9%.
- The claims line shifted from a $1.63 million provision in Q1 2012 to a $389,000 benefit in Q1 2013. Management cited favorable legal developments, recovery of a prior claim payment, and favorable experience on recent policy years. It estimated that the lower claims provision rate reduced reserves by approximately $2.37 million versus applying the prior-year rate.
- Salary and benefit expense rose to $6.15 million from $4.99 million, reflecting added technology and system-development staffing, higher business levels, and increased variable compensation. Professional and contract labor costs also rose, primarily due to technology initiatives.
- Investment portfolio unrealized gains contributed $1.56 million of other comprehensive income. The company recorded an $18,485 impairment charge on certain other investments; management considered remaining security losses temporary and reported no other-than-temporary impairments of securities during the quarter.
Outlook, risks, and contingencies
The filing gives no company earnings or revenue guidance. Management said operating results depend heavily on real estate activity and can vary with market cycles and seasonality. The cited Mortgage Bankers Association forecast projected 2013 mortgage originations down 18.2% from 2012, with purchase activity up 18.7% and refinancing down 33.0%; management noted that rising rates, declining refinancing, economic uncertainty, and other factors could affect real estate activity. These are industry forecasts, not company guidance.
Management believed operating cash flows and liquid investments would meet foreseeable needs, while cautioning that future experience may differ. Insurer subsidiary dividends and intercompany transfers are subject to regulatory limits and approvals. Principal risks include real estate and mortgage-volume changes, claims reserve adequacy, investment and interest-rate exposure, regulation, competition, rating downgrades, and geographic concentration; North Carolina represented approximately 31.5% of premiums written.
A title-insurance class action in West Virginia alleges rate fixing and seeks damages, including treble damages, and injunctive relief. The case was inactive pending resolution of a bankruptcy matter. The company disputes the allegations but said it could not reasonably estimate a potential loss. Other legal proceedings and regulatory inquiries were not expected by management to have a material effect.
Customer escrow and trust deposits, and like-kind exchange deposits and reverse-exchange property, are excluded from the balance sheet but create contingent responsibilities. Like-kind exchange deposits and reverse-exchange property totaled approximately $47.82 million, down from $55.58 million at December 31, 2012. No material subsequent events were reported. Management reported effective disclosure controls as of March 31, 2013 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether favorable claims developments and the recovery that benefited Q1 claims expense persist, and how reserve estimates develop; most reserves ($34.02 million) were for incurred-but-not-reported claims.
- Whether purchase-driven title volume offsets the expected refinancing decline and other shifts in mortgage and real estate activity.
- Investment portfolio valuation and exposure, including $930,800 of auction-rate securities valued using Level 3 inputs and the potential for further market or impairment losses.
- Developments in the class action and the company’s contingent responsibilities for customer funds and exchange transactions.
- Availability of cash from regulated insurance subsidiaries, planned technology-related capital spending, and any future share repurchases; the company repurchased 1,791 shares during the quarter.