Investors Title Company — FY 2018 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018; the filing also provides unaudited quarterly results. Investors Title is a holding company whose primary business is residential and commercial title insurance, representing 94.7% of 2018 revenue. Other businesses include tax-deferred exchange, trust and investment management, and title-agency management services. Results are sensitive to real estate transaction volumes, mortgage rates, and seasonality.
Financial performance and condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $156.3 million | $161.6 million | -3.3% |
| Net premiums written | $138.1 million | $140.5 million | -1.7% |
| Income before taxes | $27.1 million | $30.3 million | -10.6% |
| Net income attributable to Investors Title | $21.9 million | $25.7 million | -14.8% |
| Diluted EPS | $11.54 | $13.56 | -14.9% |
| Net income / total revenue | 14.0% | 15.9% | -1.9 percentage points |
| Operating cash flow | $24.4 million | $19.9 million | +$4.5 million |
Premiums declined mainly because refinance activity weakened; increased purchase activity and higher real estate values partly offset the decline. Revenue also reflected a $4.1 million unrealized loss on equity investments, recognized in earnings under a newly adopted accounting standard, and lower realized investment results. Non-title services revenue rose 15.6% to $7.1 million. Personnel expenses increased 9.1% to $43.6 million, primarily reflecting staffing for growth and technology initiatives and compensation inflation.
The claims line was a $332,000 benefit in 2018, versus a $3.3 million provision in 2017, primarily reflecting favorable claims experience and development on prior policy years. The year-end claims reserve was $31.7 million, of which $28.7 million was incurred but not reported. A three-percentage-point change in the loss ratio would affect after-tax income by approximately $3.3 million, according to the filing.
At year-end, total assets were $244.3 million, investments $182.7 million, cash and cash equivalents $18.7 million, and stockholders’ equity $175.6 million. The filing reports no outstanding note payable at year-end; it does not provide a separate debt balance. Operating cash flow exceeded net income, while cash fell $1.5 million during the year. Capital expenditures were approximately $1.9 million. The company paid $12.20 per share in dividends, including a $10.60 special dividend in the fourth quarter, totaling $23.0 million.
Material changes and unusual items
- Fourth-quarter 2018 net income attributable to the company was $135,000, or $0.07 diluted EPS, versus $9.6 million, or $5.08, in fourth-quarter 2017. The filing identifies the annual drivers discussed above, including the equity fair-value loss and the prior-year tax benefit, but does not clearly reconcile the full year-over-year fourth-quarter difference.
- The 2017 results included an approximately $5.3 million tax benefit from revaluing deferred tax balances after the Tax Cuts and Jobs Act reduced the federal corporate rate. The effective tax rate was 19.2% in 2018 versus 15.1% in 2017.
- Adoption of the equity-investment accounting standard moved fair-value changes into current-period earnings; the company recorded the $4.1 million unrealized equity loss in 2018. The adoption also involved a $16.8 million cumulative-effect reclassification from accumulated other comprehensive income to retained earnings.
- Accumulated other comprehensive income declined from $15.9 million to $0.9 million, primarily reflecting the accounting reclassification and market-related investment changes.
Outlook, risks, and contingencies
The company gave no specific earnings guidance. Citing the Mortgage Bankers Association’s January 2019 forecast, management reported projected 2019 purchase mortgage activity growth of 4.0%, refinance activity decline of 16.8%, and total originations decline of 1.8%. The forecast anticipated a 4.8% 30-year mortgage rate in fourth-quarter 2019. Management noted potential downside risks including slowing global growth, trade disputes, and stock-market volatility, and emphasized that actual results depend on market conditions beyond its control.
- Premiums are concentrated in North Carolina (40.3% of 2018 premiums written), Texas (18.5%), and South Carolina (10.2%).
- Claims estimates are uncertain and may change as long-tail claims develop; fraud, defalcation, large claims, and economic deterioration could increase losses.
- Investment values are exposed to interest-rate, credit, and equity-market risks. A modeled 100-basis-point rate increase would reduce fixed-income fair value by about $3.8 million; a 10% equity-market decline would reduce equity value by about $4.9 million. The company does not use derivatives to hedge these exposures.
- Insurance subsidiaries met statutory capital, surplus, and reserve requirements. Approximately $81.8 million of consolidated equity was restricted from transfer to the parent without regulatory approval; 2019 distributions of approximately $45.4 million were available without prior approval. These restrictions may affect parent-company liquidity and dividends.
- Customer funds excluded from the balance sheet included $31.6 million of escrow and trust deposits and $308.7 million of like-kind exchange deposits and reverse-exchange property. The company remains contingently responsible for their proper disposition and related obligations.
- Legal proceedings and regulatory inquiries were described as incidental; management did not expect them to have a material effect. The company reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- What drove the exceptionally low fourth-quarter 2018 earnings, and how much reflects recurring operating performance versus investment marks, tax effects, or other timing items?
- How sensitive are future results to claims-reserve revisions, particularly the large IBNR component and favorable prior-year development?
- What is the current investment portfolio composition and how could market movements affect earnings, equity, and statutory capital?
- How sustainable are premium and earnings trends if refinance volumes weaken further, and how exposed are results to the three largest state markets?
- How will the large off-balance-sheet customer and exchange funds, related contingent obligations, and subsidiary dividend restrictions affect liquidity and capital allocation?
- Can the company maintain its dividend policy, including special dividends, while funding technology investment and potential growth opportunities?