Investors Title Company — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Comparisons are with the corresponding 2010 periods. The company primarily provides title insurance, with most operating revenue generated by its title insurance segment.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $23.72 million | $16.22 million | $43.74 million | $29.92 million |
| Net premiums written | $21.45 million | $13.64 million | $39.32 million | $25.43 million |
| Income before taxes | $2.04 million | $3.00 million | $3.39 million | $3.02 million |
| Net income | $1.59 million | $2.54 million | $2.61 million | $2.55 million |
| Diluted EPS | $0.74 | $1.11 | $1.19 | $1.11 |
- Revenue increased 46.2% in both comparison periods; premiums written rose 57.3% in Q2 and 54.6% year to date. Management attributed premium and order growth primarily to expansion into Texas. Title orders increased 10.2% year to date to 98,409.
- Net income fell about 37% in Q2 but rose about 2% for the first half. After-tax margins were 6.7% for Q2 and 6.0% year to date, versus 15.6% and 8.5%, respectively, in 2010.
- Operating expenses rose 64.0% in Q2 and 50.0% year to date, led by agent commissions. Q2 commissions more than doubled; the company cited increased agency business and a higher mix of Texas business, which carries higher premium and commission rates.
- Investment income declined 4.0% in Q2 and 2.4% year to date. Net realized investment gains were lower than in 2010.
Cash flow, financial position, and capital
- First-half operating cash flow was $3.18 million, compared with cash used of $0.50 million in 2010. Investing activities provided $6.72 million; financing activities used $5.36 million, including $5.21 million of share repurchases and $0.30 million of dividends.
- Cash and equivalents were $12.65 million at June 30, 2011, up from $8.12 million at December 31, 2010. Short-term investments were $22.21 million; total investments were $124.92 million. Total assets were $153.39 million and stockholders’ equity was $102.38 million.
- The balance sheet lists no debt line item. Reserves for claims were $37.61 million, down from $38.20 million at year-end. Claims reserves include $31.77 million for incurred-but-not-reported claims and are subject to estimation uncertainty.
- The company repurchased 162,411 shares in the first half for approximately $5.21 million; 311,165 shares remained authorized under the repurchase plan at quarter-end. The quarterly dividend was $0.07 per share.
Outlook, risks, and unusual items
- No company-specific earnings or revenue guidance is provided. Management described the real estate market and broader economy as uncertain and expected sluggish real estate conditions to continue through the balance of 2011. It cited an MBA forecast for 2011 mortgage originations down about 34.8% from 2010, including projected declines in refinancing and purchase activity.
- Results remain sensitive to real estate transactions, mortgage originations and refinancing, economic conditions, competition, regulation, and the company’s concentration in North Carolina and Texas. Management cautioned that claims reserves may require significant adjustment as experience develops.
- Q2 2010 included a $942,000 fidelity-bond recovery that reduced the prior-year claims provision, making the Q2 year-over-year claims comparison less favorable. Year-to-date 2011 realized gains included investment and other-asset impairment charges; management considered remaining unrealized security losses temporary.
- A title-insurance rate-fixing class action is pending in West Virginia and is inactive pending resolution of a bankruptcy matter. The company disputes the allegations; it cannot reasonably estimate potential losses. Management says other proceedings and regulatory inquiries are not expected to have a material impact.
- Customer escrow and exchange funds are excluded from the balance sheet, but the company remains contingently liable for their disposition. Like-kind exchange deposits and reverse-exchange property totaled approximately $12.24 million at June 30, 2011.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether Texas-driven premium growth can continue and offset weakness in the company’s established markets.
- Whether higher agency commissions and claims costs will continue to pressure margins; review the claims reserve assumptions and development.
- How ongoing weakness in real estate and mortgage activity affects order volumes, revenues, and liquidity.
- Fair value and liquidity exposure from auction-rate securities, including $5.39 million of company-held securities classified as Level 3.
- Developments in the West Virginia litigation, regulatory matters, and the company’s contingent responsibilities for customer funds.