Investors Title Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts below are in millions of dollars unless stated otherwise. The company primarily provides title insurance; title-segment revenue represented 94.7% of revenue for the first half of 2018.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $41.9 | $40.1 | $75.7 | $77.9 |
| Income before tax | $8.8 | $8.3 | $14.0 | $14.8 |
| Net income attributable to company | $6.9 | $5.7 | $11.1 | $10.2 |
| Diluted earnings per share | $3.66 | $2.99 | $5.87 | $5.35 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $6.1 | $5.7 |
- Revenue rose 4.5% in Q2 but declined 2.8% for the first half. Net income attributable to the company increased 22.4% in Q2 and 9.6% for the first half.
- Net premiums written were $35.1 million in Q2, up 1.4%, and $64.7 million for the first half, down 4.0%. First-half declines reflected weaker refinancing activity and a shift toward markets with lower average property values; Q2 growth reflected higher property values and a more favorable purchase mix.
- Reported after-tax profit margins were 16.6% for Q2 and 14.7% for the first half, compared with 14.1% and 13.0%, respectively, in 2017. Effective tax rates fell to 21.5% for Q2 and 21.0% for the first half, from 32.0% and 31.5%, respectively, largely reflecting the lower federal corporate tax rate.
- Personnel expense increased 8.6% in Q2 and 11.2% year to date, driven by staffing, software-related contract work, and wage and benefit increases. First-half operating expenses nevertheless fell 2.3%, supported by lower agent commissions and an $0.8 million claims benefit.
Financial position and liquidity
- At June 30, cash and cash equivalents were $29.3 million, compared with $20.2 million at year-end 2017. Investments totaled $179.2 million, down from $186.5 million. Total assets were $253.2 million and stockholders’ equity was $186.1 million.
- First-half operating cash flow was $6.1 million; investing activities provided $4.5 million and financing activities used $1.5 million. Cash increased $9.1 million over the period.
- The balance sheet presents no borrowings or debt line item; the filing text does not provide a separate debt metric. Current liabilities and a conventional current ratio are not presented.
- The claims reserve was $32.5 million, down from $34.8 million at year-end. The company recorded an $0.8 million first-half claims benefit; 87.9% of the reserve was for incurred-but-not-reported claims. Management considers reserves adequate but notes estimates may change materially.
- Dividends paid were $0.80 per common share in the first half, versus $0.55 a year earlier. No shares were repurchased during Q2.
Changes, outlook, and risks
- Equity-security fair-value changes began flowing through earnings in 2018 under newly adopted accounting guidance. The company recorded a $0.3 million unrealized equity loss for the first half (including a $0.3 million Q2 gain). Fixed-maturity unrealized losses reduced other comprehensive income by $1.5 million after tax.
- Adoption of accounting standards caused a $13.6 million cumulative reclassification from accumulated other comprehensive income to retained earnings; this was an accounting presentation change, not an operating cash flow. Revenue-standard adoption had no material financial-statement impact.
- The filing gives no company-specific earnings or revenue guidance. Management said operating results depend heavily on real estate and mortgage activity and are seasonal and cyclical. It cited an external MBA forecast for 2018: purchase originations up 5.1%, refinancings down 23.7%, and total mortgage originations down 5.0%. These are third-party projections, not company guidance.
- Key exposures include rising interest rates and declining refinance volumes, real-estate market cycles, concentration in North Carolina and Texas, investment-market and credit risk, possible claims-reserve variability, regulation, competition, and technology or cybersecurity disruption. Management reported no material change in market risk and said it expects operating cash flows to meet foreseeable needs, while noting acquisitions or adverse developments could require additional capital.
- Legal proceedings and regulatory audits are described as incidental; management does not expect them to have a material consolidated financial impact. The company nevertheless remains contingently liable for customer escrow and exchange funds. Like-kind exchange deposits and reverse-exchange property totaled $135.8 million at June 30 and are excluded from the balance sheet.
Investor verification points
- Confirm the sustainability of premium growth and the effect of weaker refinancing activity, especially in the company’s core markets.
- Assess whether personnel and technology cost increases can be supported by revenue growth and operating efficiency.
- Review claims-reserve assumptions and future development, particularly the large incurred-but-not-reported component.
- Separate recurring operating performance from investment gains, equity fair-value volatility, tax-rate effects, and accounting reclassifications.
- Evaluate investment portfolio sensitivity to interest rates and the contingent obligations associated with escrow and exchange funds.