Investors Title Company — Q2 2019 Form 10-Q
Business and period: Investors Title Company provides title insurance primarily through its insurance subsidiaries, alongside exchange, trust, and other services. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $42.7 | $41.9 | $82.7 | $75.7 |
| Income before tax | $6.9 | $8.8 | $15.2 | $14.0 |
| Net income attributable to Company | $5.5 | $6.9 | $12.1 | $11.1 |
| Diluted EPS | $2.90 | $3.66 | $6.40 | $5.87 |
| After-tax profit margin, as reported by company | 12.9% | 16.6% | 14.7% | 14.7% |
- Revenue mix and changes: Net premiums written declined 0.5% in Q2 and 1.4% in the first half, to $35.0 million and $63.8 million. Escrow and other title-related fees also fell. Non-title services rose to $2.5 million in Q2 and $4.9 million in the first half, primarily on higher exchange-services revenue.
- Investment effects: First-half revenue included $5.8 million of gains from changes in the estimated fair value of equity securities, compared with a $0.3 million loss in the prior-year period. These market-driven gains contributed significantly to the year-over-year revenue increase. Q2 also included $1.1 million of such gains.
- Expenses and claims: Operating expenses rose 8.1% in Q2 and 9.4% in the first half. The claims provision was $2.4 million in Q2 and $2.6 million in the first half, versus $0.6 million and a $0.8 million benefit, respectively, in 2018. Management cited a potential large claim and more favorable prior-year loss development. Personnel expenses increased, in part due to staffing and software initiatives.
- Cash flow: First-half operating cash flow was $0.8 million, down from $6.1 million. Investing activities provided $18.7 million and financing activities used $1.5 million, including $1.5 million of dividends. Cash and cash equivalents increased $18.0 million to $36.7 million.
- Financial position and liquidity: At June 30, total assets were $256.5 million, total liabilities $68.2 million, and stockholders’ equity $188.3 million. Cash, short-term investments, available-for-sale fixed maturities, and equity securities totaled approximately $197.0 million. The filing says the Company does not carry debt; it reported $4.7 million of operating lease liabilities following adoption of the new lease standard.
- Returns to shareholders: The Company paid $0.40 per share in Q2 dividends ($0.80 per share for the first half). It repurchased no shares during Q2 and repurchased 66 shares in the first half.
Outlook, risks, and notable items
- The Company provided no specific financial guidance. Management said results depend on cyclical real estate and mortgage activity, interest rates, investment markets, and title-claim experience. The filing cited an industry forecast for 2019 growth in mortgage originations and a slight decline in 2020; these are third-party projections, not Company guidance.
- Management said it believes operating cash generation and working capital should meet foreseeable operating needs, while noting that real estate conditions, claims, ratings, regulation, and potential acquisitions could affect capital needs. Title insurance subsidiaries met applicable minimum capital, surplus, and reserve requirements at period-end; dividend capacity is subject to regulatory limits.
- Claims reserves were $33.0 million, including $5.0 million for known claims and $28.0 million for incurred-but-not-reported claims. Management considers the reserve adequate, but states estimates are uncertain and adjustments could be significant.
- Client escrow and trust deposits are excluded from the balance sheet, but the Company remains contingently responsible for their disposition. Like-kind exchange deposits and reverse-exchange property were approximately $253.4 million, also off balance sheet and subject to related contingent responsibilities.
- Other exposures include up to $18.4 million of potential loss on variable-interest-entity investments, limited to the Company’s investment commitments, and $12.1 million of estimated unfunded executive retirement-related benefits. Management said incidental legal proceedings and regulatory examinations were not expected to have a material impact.
- Adoption of lease accounting in January 2019 added operating right-of-use assets and lease liabilities to the balance sheet; the Company reported no material impact on income or cash flows. Management reported no material changes in previously disclosed risk factors or market risks, and no material subsequent events.
Investor verification points
- Assess how much reported revenue and earnings depend on volatile equity fair-value gains, and how investment performance changes in later periods.
- Monitor the potential large claim, claims-reserve assumptions, and any subsequent reserve development.
- Reconcile weak first-half operating cash flow with net income, including the timing of tax payments and other working-capital movements.
- Evaluate title-premium trends by market and channel, and the effect of real estate, refinance, and interest-rate conditions.
- Review the contingent responsibilities tied to client escrow and exchange funds, and the liquidity and regulatory limits applicable to insurance subsidiaries.