Investors Title Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Investors Title primarily underwrites title insurance through its insurance subsidiaries; title insurance represented 95.7% of nine-month revenue. Results are unaudited.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $43.1 million | $41.0 million | $121.1 million | $99.7 million |
| Income before taxes | $8.9 million | $11.4 million | $23.7 million | $20.5 million |
| Net income attributable to company | $5.9 million | $8.1 million | $16.1 million | $14.5 million |
| Basic EPS | $3.14 | $4.30 | $8.52 | $7.55 |
| Cash dividends per share | $0.40 | $0.20 | $0.95 | $0.52 |
- Q3 revenue rose 5.2%, while net income attributable to the company fell 27.1%. Nine-month revenue increased 21.4% and net income increased 11.1% year over year.
- Management reported combined after-tax profit margins of 13.7% for Q3 and 13.3% for the first nine months, versus 19.8% and 14.5%, respectively, in 2016.
- Nine-month net premiums written increased 17.8% to $102.9 million. Q3 premiums increased 0.8% to $36.6 million. Other revenue rose to $13.9 million for nine months, from $8.3 million, primarily on higher title-fee and agency commission income.
- Nine-month operating expenses rose 22.9% to $97.4 million. Q3 operating expenses rose 15.5% to $34.2 million. Higher salaries, occupancy costs, claims provision and acquisition-related expenses contributed to the increases.
- The claims provision was $2.7 million for nine months, compared with a $0.4 million benefit in 2016. For Q3, the provision was $1.9 million versus a $1.1 million benefit. Management attributed the comparison primarily to favorable loss development in 2016.
- Investment income declined to $3.3 million for nine months from $3.5 million; realized investment gains increased to $1.0 million from $0.6 million.
Cash, liquidity and capital
- Nine-month operating cash flow was $18.9 million, compared with $14.8 million in 2016. Cash and cash equivalents increased $3.0 million during the period to $30.9 million.
- At September 30, total assets were $253.2 million and total liabilities were $81.1 million. Investments totaled $178.1 million, including $20.7 million of short-term investments. The balance sheet does not list borrowings or a debt balance; it reports $35.2 million of claims reserves.
- Stockholders’ equity totaled $172.1 million. The company paid $1.8 million in dividends and repurchased $49,604 of stock during the first nine months.
- Management said both title insurance subsidiaries met applicable minimum capital, surplus and reserve requirements, and believes operating cash flows will meet foreseeable operating needs. Insurer dividends and intercompany transfers are subject to state regulation.
Outlook, risks and unusual items
- The filing provides no specific company revenue or earnings guidance. Management describes results as dependent on cyclical real estate activity, mortgage originations, interest rates, agent retention and the investment environment. The MBA forecast cited by management projected 2017 purchase activity growth but lower refinancing and total mortgage originations; these are industry forecasts, not company guidance.
- Key risks include real estate and mortgage-market downturns, concentration in North Carolina and Texas, claims-reserve uncertainty, investment-market losses, regulatory changes, competition, technology and cybersecurity risks, and restrictions on subsidiary dividends.
- Claims reserves were $35.2 million, of which $30.3 million was for incurred-but-not-reported claims. Management considers reserves adequate but notes that estimates may change significantly as claims experience develops.
- Escrow and like-kind exchange funds and property are excluded from the balance sheet. Like-kind exchange deposits and reverse-exchange property totaled approximately $213.9 million at quarter-end; the company remains contingently liable for their proper disposition.
- Legal proceedings and regulatory audits are described as incidental; management does not expect them to have a material aggregate effect. No material subsequent events were reported.
- The company made immaterial revenue classification corrections in 2017. They reclassified amounts between net premiums written and other revenue and had no effect on previously reported financial position or results of operations.
- The company reported no material changes in market risk or internal controls; management concluded disclosure controls were effective as of September 30, 2017.
Important facts for investors to verify
- Whether premium growth and the Texas agency acquisition can offset slowing refinance activity and higher operating costs.
- Claims-reserve adequacy and the effect of future claims development, particularly given the shift from favorable 2016 development to a 2017 provision.
- Investment portfolio exposure to equity-market, interest-rate and credit changes, including the significance of unrealized gains and losses.
- Liquidity and capital available at the parent company versus regulated insurance subsidiaries, and any restrictions on distributions.
- Potential exposure and operational controls associated with off-balance-sheet escrow and exchange funds, totaling approximately $213.9 million.