Investors Title Company — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; this is an annual filing, not a standalone fourth-quarter report. Comparisons are primarily with FY 2011. The company’s primary business is title insurance; related services include tax-deferred exchanges, investment and trust management, and agency services.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Total revenue | $115.1 million | $90.7 million | +26.9% |
| Net premiums written | $102.3 million | $81.5 million | +25.5% |
| Operating expenses | $99.0 million | $81.2 million | +21.9% |
| Income before income taxes | $16.1 million | $9.5 million | — |
| Net income attributable to the Company | $11.1 million | $6.9 million | — |
| Diluted earnings per share | $5.24 | $3.20 | — |
| Operating cash flow | $8.7 million | $9.0 million | Down |
- Consolidated after-tax profit margin was 9.6%, versus 7.6% in 2011; title insurance segment margin was 10.4%, versus 8.7%.
- Investment income was $4.0 million, up from $3.6 million. Net realized investment gain was $1.1 million, compared with $29,000 in 2011.
- At year-end, assets were $171.9 million, investments $130.8 million, cash and cash equivalents $20.8 million, and stockholders’ equity $114.6 million. Book value per share was $56.10.
- Claims reserves totaled $39.1 million, including $33.9 million for incurred-but-not-reported claims. The company reported no debt balance as a distinct line item; the filing text does not provide a clear total debt figure.
- Dividends were $0.29 per share for the year. The company repurchased 70,702 shares during 2012.
Material changes and drivers
- Premium growth reflected higher real-estate and mortgage activity, increased refinancing and purchase transactions, and new industry-wide premium charges and rate increases. Title orders rose 17.6% to 240,233.
- North Carolina premiums increased to $31.3 million from $21.7 million; Texas premiums decreased to $25.5 million from $26.3 million. North Carolina represented about 30.5% of title premiums and Texas 24.8% in 2012.
- Claims provision rose to 5.9% of net premiums written from 4.1%, partly because the 2011 provision benefited from favorable loss development and North Carolina’s share of premiums increased.
- Operating cash flow declined modestly, principally because receivables increased. Year-end premium and fee receivables rose to $11.0 million from $6.8 million.
- The company acquired a 70% interest in Michigan agency United Title Agency Co., LLC, effective April 2, 2012. The transaction included $350,000 paid and $691,250 estimated contingent consideration; the remaining 30% is subject to purchase options.
Outlook, risks and contingencies
- Management said operating cash flows and liquid investments should meet foreseeable operating needs, while noting results and cash generation depend on real-estate conditions, interest rates, claims experience, and financial-strength ratings. No company-specific earnings or revenue guidance was provided.
- Management cited an industry forecast projecting 2013 mortgage originations down 19.4%, with refinancing down 34.4% and purchase activity up 17.7%. These are third-party estimates, not company guidance.
- Key risks include real-estate and mortgage-cycle volatility; uncertainty in long-tail claims reserves; fraud or defalcation by agents, attorneys, or employees; investment-market losses; regulation and rate controls; competition; technology and cybersecurity; and geographic concentration.
- Insurance regulation restricts transfers from subsidiaries: approximately $76.2 million of consolidated equity could not be transferred to the parent without regulatory approval. The company stated that its insurers met statutory capital, surplus, and premium-reserve requirements at year-end.
- A title-insurance rate-fixing class action remained pending in West Virginia, inactive pending resolution of a related bankruptcy. The company considers it without merit but could not reasonably estimate potential losses. Management considered other proceedings not material in aggregate.
- Customer escrow and trust funds of approximately $11.7 million and like-kind exchange deposits and property of $55.6 million were off balance sheet; the company remains contingently responsible for their proper disposition. After temporary unlimited FDIC coverage expired, $20.3 million of the company’s $20.8 million cash balance was uninsured at year-end.
- Net realized investment gains included impairment charges of approximately $99,940, offset by gains on sales and other items. Management considered unrealized losses on remaining securities temporary.
Important facts for investors to verify
- Whether the strong premium growth continues if refinancing activity contracts, and how purchase transactions offset that decline.
- Claims-reserve adequacy and subsequent loss development, especially given the 2012 increase in the claims provision rate.
- Receivable growth, collection experience, and the allowance for doubtful accounts.
- Investment portfolio valuation and exposure to market, credit, and interest-rate changes, including the remaining auction-rate securities.
- Regulatory limits on upstreaming subsidiary capital, uninsured bank deposits, and the status and potential exposure of the pending lawsuit.
- The performance and contingent purchase obligations associated with United Title Agency, and the use of cash for repurchases, dividends, and planned technology investment.