Investors Title Company — Q2 2013 Form 10-Q
Business context and period: The company primarily underwrites title insurance through Investors Title Insurance Company and National Investors Title Insurance Company. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $33.69 million | $26.08 million | $60.54 million | $48.49 million |
| Net premiums written | $30.43 million | $23.24 million | $54.36 million | $42.91 million |
| Income before tax | $5.87 million | $4.62 million | $10.62 million | $6.56 million |
| Net income attributable to company | $4.01 million | $3.35 million | $7.38 million | $4.78 million |
| Diluted EPS | $1.92 | $1.57 | $3.54 | $2.24 |
| Cash dividends per common share | $0.08 | $0.07 | $0.16 | $0.14 |
Q2 revenue increased 29.2% and company-attributable net income increased 19.6% year over year. For the first half, revenue grew 24.8% and attributable net income grew 54.4%. Management reported after-tax profit margins of 11.9% for Q2 and 12.2% for the first half, versus 12.8% and 9.9%, respectively, in 2012.
Cash flow and financial position: First-half operating cash flow was $5.72 million, versus $1.53 million a year earlier. Investing activities provided $1.51 million, financing activities used $1.64 million, and cash increased $5.59 million to $26.40 million. At June 30, total assets were $180.53 million, investments were $129.73 million, and stockholders’ equity was $121.80 million. Claims reserves totaled $38.77 million. The balance sheet presents no debt line; the filing does not provide a separate debt metric.
Material changes and management commentary
- Title orders rose 10.6% in the first half, to 122,992. Management attributed premium growth primarily to increased purchase transactions, higher average home values, and premium rate changes in some markets. Agency premiums grew faster than home and branch premiums.
- Operating expenses rose 29.6% in Q2 and 19.1% in the first half. Higher agent commissions and personnel costs were key contributors; commission expense rose faster than agency premiums in Q2.
- The first-half claims provision fell to $607,812 from $1.99 million in 2012. Management said the six-month loss provision rate was 1.1%, versus 4.6%, and estimated that the lower rate resulted in approximately $1.916 million less in reserves than would have been recorded at the prior-year rate. Q2 claims provision, however, increased to $996,870 from $361,107.
- Investment income declined to $1.85 million for the first half from $1.99 million, reflecting a smaller fixed-maturity portfolio and lower yields. First-half realized investment gains were $71,616, compared with $258,029 in 2012.
- Unrealized investment gains increased first-half other comprehensive income by $442,571; Q2 other comprehensive income was negative $1.12 million, largely reflecting market-value declines in investments. Total stockholders’ equity increased to $121.80 million from $114.64 million at year-end.
Outlook, risks and contingencies
The company provided no specific earnings or revenue guidance. Management said operating results depend heavily on real estate transactions, mortgage originations and refinancing, interest rates, and regional market conditions. The cited Mortgage Bankers Association forecast projected lower 2013 total mortgage originations and refinancing, but higher purchase activity. Management believed internally generated funds and liquid investments would meet foreseeable operating needs, while noting that outcomes may differ from historical experience.
- Claims and reserves: Reserves include $4.44 million for known claims and $34.33 million for incurred-but-not-reported claims. Management considers reserves adequate, but estimates can change materially as claims experience develops.
- Market and regulatory exposure: Investment values are sensitive to interest rates and credit spreads. The filing also identifies potential effects from real-estate weakness, mortgage-rule changes, title-industry regulation, competition, and the company’s geographic concentration, particularly in North Carolina and Texas.
- Legal matter: A class action alleging title-insurance rate fixing remains pending on an inactive docket. The company considers the case without merit but cannot reasonably estimate a potential loss range.
- Off-balance-sheet customer funds: The company administers escrow and trust deposits and like-kind exchange funds/property that are excluded from its assets. Like-kind exchange deposits and reverse-exchange property totaled approximately $56.3 million; the company remains contingently responsible for their disposition.
- Other items: The company repurchased 19,460 shares in the first half for $1.38 million and paid an additional $350,000 toward the United Title Agency acquisition. Management reported no material subsequent events or material changes in market risk.
Important facts for investors to verify
- Whether premium growth and order volumes remain resilient if refinancing declines or real-estate activity softens.
- How much first-half earnings growth reflects lower claims provisions, and whether subsequent reserve development supports current estimates.
- The evolution of agent commission rates, operating costs, and profit margins relative to premium growth.
- Investment portfolio sensitivity to interest rates and credit conditions, including the valuation of auction-rate securities.
- Developments in the rate-fixing litigation, regulatory requirements, and the company’s ability to obtain distributions from regulated insurance subsidiaries.
- Future use of cash for share repurchases, dividends, technology investment, and acquisition-related payments.