Investors Title Company — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with FY 2010. Investors Title is a holding company whose principal business is title insurance. Title insurance generated 95.8% of operating revenue. The filing is an annual report, not a standalone fourth-quarter report.
Key financial results
| Metric | FY 2011 | FY 2010 | Change / context |
|---|---|---|---|
| Total revenue | $90.7 million | $71.3 million | Up 27.2% |
| Net premiums written | $81.5 million | $61.5 million | Up 32.6% |
| Net income | $6.9 million | $6.4 million | Up 8.8% |
| Diluted EPS | $3.20 | $2.78 | Up 15.1% |
| After-tax profit margin | 7.6% | 8.9% | Down 1.3 percentage points |
| Investment income | $3.6 million | $3.7 million | Down modestly |
| Operating cash flow | $9.0 million | $4.2 million | More than doubled |
| Cash and cash equivalents, year-end | $18.0 million | $8.1 million | Up $9.9 million |
| Total assets / stockholders’ equity, year-end | $158.0 million / $106.5 million | $153.5 million / $103.9 million | Equity up; book value per share was $50.54 |
The balance sheet reports no borrowings or debt line item. At year-end, investments totaled $125.7 million, comprising $85.4 million of fixed maturities, $22.5 million of equity securities, $14.1 million of short-term investments and $3.6 million of other investments. Total liabilities were $51.4 million, including $38.0 million of claims reserves.
Material changes and operating drivers
- Premium growth was driven primarily by the company’s expansion into Texas in late 2010. Texas premiums rose to $26.3 million from $2.1 million; North Carolina premiums declined to $21.7 million from $23.5 million. Texas and North Carolina together accounted for 58.8% of title premiums.
- Title orders declined 1.0%, to 204,230. Home and branch premiums fell 8.2%, while agency premiums increased 49.5% and reached 79.8% of net premiums written.
- Expenses increased 29.5%, faster than total revenue. Agent commissions rose 59.0%; commissions were 76.3% of agency premiums versus 71.7% in 2010, reflecting the geographic mix, especially Texas. The title segment’s after-tax margin declined to 8.7% from 10.4%.
- The claims provision rate fell to 4.1% of net premiums from 7.2%, reflecting favorable development on prior policy years and a smaller share of North Carolina business. Prior-year reserve releases contributed $3.5 million to the 2011 claims provision calculation. Total claims reserves decreased slightly to $38.0 million; 83.6% related to incurred-but-not-reported claims.
- Net realized investment gains fell to $29,000 from $655,000. The 2011 amount included $325,000 of impairment charges, offset by gains on sales of investments and other assets.
- Cash dividends were $0.28 per share, unchanged from 2010. The company repurchased 182,615 shares during 2011 for approximately $5.9 million.
Cash flow, liquidity and capital
Cash from operations was $9.0 million, investing activities provided $7.3 million, and financing activities used $6.4 million, principally for share repurchases and dividends. Management said operating cash flow, subsidiary distributions and liquid investments should meet foreseeable operating needs. However, approximately $73.2 million of consolidated equity represented subsidiary net assets that generally cannot be transferred to the parent without regulatory approval. The insurers reported combined statutory capital and surplus of $93.1 million.
Cash held for customers’ escrow and trust accounts, excluded from the balance sheet, was $15.6 million. Like-kind exchange deposits and reverse-exchange property held for customers totaled $35.4 million, also excluded from assets; the company remains contingently responsible for their proper disposition. The filing reports no clear consolidated debt balance beyond the liabilities listed above.
Outlook, risks and contingencies
- Management described the real estate market and broader economy as uncertain and expected sluggish market conditions to continue in 2012. The MBA forecast cited in the filing projected mortgage originations down 21.4% in 2012 and refinancing down 32.1%, partly offset by a 1.5% increase in purchase activity. These are third-party industry forecasts, not company guidance.
- Results are sensitive to real estate sales, mortgage originations and refinancing, interest rates, home prices, credit availability and seasonal transaction patterns. Fixed costs can amplify the effect of volume changes.
- Major risks include claims-reserve uncertainty and long-tail losses; fraud, defalcation and misconduct by agents or employees; investment-market declines and impairments; regulatory changes, including CFPB/RESPA developments; competition and rating downgrades; and concentration in Texas and North Carolina. One agent accounted for 22.6% of net premiums written in 2011.
- A class action alleging title-insurance rate fixing remains pending in West Virginia, currently inactive pending resolution of a bankruptcy. The company considers the case without merit, but said it could not reasonably estimate any potential loss. Management considered other routine legal proceedings immaterial in aggregate.
- In January 2012, the company agreed to acquire a 70% interest in an unaffiliated agency, with an option to acquire all of it. Closing was anticipated in the second quarter of 2012, subject to conditions; the final purchase price was not established. The agreement specifies a maximum of $1.04 million for the majority interest and a minimum of $1.00 million for the whole agency.
- Management assessed internal control over financial reporting as effective at year-end. The independent auditor issued an unqualified opinion on the financial statements; it was not engaged to audit internal controls.
Important facts for investors to verify
- Whether Texas expansion can sustain premium growth while preserving margins, given higher agency commissions and the decline in title-segment margin.
- Subsequent claims experience and reserve development, especially the large IBNR share and the favorable prior-year development that reduced the 2011 provision rate.
- Actual purchase terms, closing and performance of the proposed agency acquisition.
- Regulatory limits on subsidiary distributions and the liquidity implications of customer escrow and exchange funds for which the company remains responsible.
- Developments in the rate-fixing litigation, investment impairments and the company’s concentrated exposure to Texas, North Carolina and a major agent.