Investors Title Company — Q1 2022 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2022, compared with the same quarter of 2021. Investors Title primarily underwrites title insurance; its title segment represented 96.9% of revenue. Results are seasonal and sensitive to real estate and mortgage activity.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $69.0 million | $72.1 million | Down 4.3% |
| Income before taxes | $7.8 million | $17.3 million | Down 55.0% |
| Net income | $6.2 million | $13.8 million | Down 55.3% |
| Diluted EPS | $3.25 | $7.29 | Down 55.4% |
| Operating cash flow | $1.3 million | $8.2 million | Down $6.9 million |
| After-tax profit margin | 9.0% | 19.2% | Down 10.2 percentage points |
Revenue and expenses. Net premiums written rose 2.7% to $63.1 million, which management attributed mainly to higher average home prices and purchase activity. Escrow and other title-related fees increased to $5.1 million from $2.8 million; non-title services increased to $2.4 million from $2.1 million. Investment results were a major drag: equity-security fair-value changes were a loss of $5.9 million, versus a gain of $3.2 million a year earlier. Net realized investment gains rose to $1.7 million from $0.3 million.
Operating expenses rose 11.8% to $61.2 million. Personnel expense increased to $21.3 million from $16.2 million, and office and technology expense to $4.4 million from $2.7 million, reflecting staffing, benefits, technology, and facilities costs. The claims provision fell to $0.2 million from $1.6 million, primarily due to more favorable loss development.
Balance sheet, liquidity, and debt. At March 31, 2022, total assets were $328.4 million, total liabilities $95.9 million, and stockholders’ equity $232.5 million. Cash and cash equivalents were $37.3 million; short-term investments were $58.6 million; available-for-sale fixed maturities were $67.7 million; and equity securities were $69.9 million. Management said cash, short-term investments, marketable securities, and operating cash flows should be sufficient for requirements over the next 12 months and thereafter. The company reported no debt. Operating lease liabilities were $7.5 million.
Cash from operations was $1.3 million, investing activities used $0.3 million, and financing activities used $0.9 million, including $0.9 million of dividends. Cash increased $0.1 million in the quarter. The quarterly dividend was $0.46 per share. Fixed-maturity unrealized losses increased amid interest-rate and credit-spread movements; accumulated other comprehensive income fell to $1.2 million from $3.2 million at year-end.
Material changes, outlook, and risks
- Lower net income chiefly reflected the swing in equity-security fair-value changes and higher operating costs, partly offset by higher premiums and title-related fees and a lower claims provision.
- No company earnings or revenue guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- The company cited the MBA’s March 2022 forecast—not company guidance—projecting 2022 purchase activity up 7.7%, refinance activity down 63.3%, and total mortgage originations down 34.0% from 2021. The average 30-year mortgage rate was 3.8% in Q1 2022 versus 2.9% in Q1 2021; the MBA forecast 4.5% by Q4 2022.
- Key risks include real-estate and mortgage-market cyclicality, rising interest rates, inflation, market volatility, COVID-19 and the Russia-Ukraine conflict, investment losses, claims-reserve uncertainty, regulatory changes, cybersecurity events, and reliance on North Carolina, Texas, Georgia, and South Carolina markets.
- The $36.4 million claims reserve includes $3.9 million for known claims and $32.5 million for incurred-but-not-reported claims; management considered it adequate but noted estimates may change materially. Legal proceedings and regulatory inquiries were not expected by management to have a material impact.
- Off-balance-sheet customer funds include $571.4 million of like-kind exchange deposits and reverse-exchange property. These are not company assets, but the company remains contingently liable for their disposition and related obligations.
- On May 4, 2022, the insurance subsidiary amended employment and death-benefit agreements with three executives. Changes include updated severance calculations based on highest salary and average of the three highest annual bonuses, and a change-in-control bonus formula of three times highest salary plus three times that bonus average. This was a subsequent event after quarter-end.
Important facts for investors to verify
- Whether premium growth and title-fee momentum can offset a potentially weaker refinancing and housing market.
- How equity-market movements, interest rates, and investment income affect reported revenue and accumulated other comprehensive income.
- Whether personnel and technology spending produces operating leverage as transaction volumes change.
- The development of claims reserves, particularly incurred-but-not-reported claims and favorable loss development.
- The scale and terms of executive severance and change-in-control obligations, and contingent responsibilities for customer exchange funds.