Investors Title Company — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Figures are in USD millions, except per-share data. The company primarily underwrites title insurance; title represented 94.7% of revenue for the first nine months.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $48.3 | $43.1 | $124.0 | $121.1 |
| Income before tax | $12.6 | $8.9 | $26.6 | $23.7 |
| Net income attributable to company | $10.6 | $5.9 | $21.8 | $16.1 |
| Diluted EPS | $5.61 | $3.13 | $11.47 | $8.48 |
| Operating expenses | $35.7 | $34.2 | $97.4 | $97.3 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $15.3 | $18.9 |
- After-tax profit margin was 22.0% for Q3 and 17.5% for the nine months, versus 13.7% and 13.3% in the comparable 2017 periods.
- At September 30, cash and cash equivalents were $36.9, short-term investments $27.7, total investments $182.9, and total assets $266.6. Stockholders’ equity was $195.5.
- Total liabilities were $71.0, including a $32.4 claims reserve. The balance sheet reports no borrowings or debt.
- Nine-month investing cash flow was positive $3.7; financing cash outflow was $2.3, including $2.3 of dividends. Cash increased $16.6 to $36.9.
Changes versus prior comparable periods
- Q3 revenue rose 11.9% and company-attributable net income rose 79.4%. Nine-month revenue increased 2.4% and net income increased 35.3%.
- Q3 net premiums written increased 5.3% to $39.4; nine-month premiums edged down 0.7% to $104.1. Management attributed Q3 strength to higher property values, a shift toward higher-premium purchase business, and new agencies; lower refinancing activity weighed on year-to-date agency premiums.
- Nine-month operating expenses were essentially unchanged. Personnel costs rose to $33.2 from $30.0, while commissions declined to $48.9 from $50.6.
- The claims provision fell to $0.2 for the first nine months from $2.7 a year earlier, reflecting favorable claims experience and reductions in estimates for previously identified large losses. Q3 provision was $1.0 versus $1.9.
- Cash from operations decreased despite higher net income, primarily due to timing of disbursements and a lower claims provision.
Outlook, accounting matters, and risks
- The filing gives no company-specific earnings or revenue guidance. Management says results depend substantially on real estate transactions, mortgage activity, interest rates, and regional market conditions. It cites an MBA forecast of 2018 purchase activity growth and a 26.8% decline in refinancing activity; these are third-party projections, not company guidance.
- Management noted rising mortgage rates, limited housing inventory, and worsening affordability as factors restraining home sales. The company was monitoring Hurricanes Florence and Michael but did not expect a material long-term financial impact.
- Adoption of accounting guidance for equity securities moved fair-value changes into earnings. The company recorded a $2.6 nine-month unrealized equity gain, including $2.9 in Q3, contributing to reported profit. Adoption also included a $16.8 opening-equity reclassification from accumulated other comprehensive income to retained earnings; it did not represent operating cash or current-period earnings.
- Fixed-maturity securities had $52.3 of fair value in an unrealized-loss position, with $1.0 of gross unrealized losses. Management considered the declines temporary, citing no intent or expected need to sell before recovery; market-value recovery is not assured.
- Like-kind exchange deposits and reverse-exchange property totaled approximately $185.9, excluded from company assets but subject to contingent obligations to customers. Legal proceedings and regulatory inquiries were described as not expected to have a material impact. Claims estimates remain uncertain; the $32.4 reserve was approximately 90% for incurred-but-not-reported claims.
- Other risks include real-estate cyclicality, reliance on North Carolina and Texas, regulatory changes, investment-market losses, competition, technology and cybersecurity, and limits on dividends from regulated insurance subsidiaries.
Investor verification checklist
- Separate recurring underwriting and service performance from investment gains, particularly the $2.6 unrealized equity gain recognized in earnings.
- Assess sustainability of the unusually low nine-month claims provision and adequacy of the $32.4 reserve, especially its incurred-but-not-reported component.
- Track purchase and refinance volumes, mortgage rates, agency premiums, and geographic concentration in North Carolina and Texas.
- Review the investment portfolio’s sensitivity to interest rates and equity-market movements, and confirm the company’s liquidity and statutory capital at its insurance subsidiaries.
- Understand controls and contingent obligations associated with the $185.9 of customer exchange deposits and property held off balance sheet.