Business Context and Reporting Period
Investors Title Company is a holding company primarily underwriting title insurance through ITIC and NITIC; title insurance represented 93.9% of revenue in the quarter. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the same quarter of 2015. First-quarter activity is typically seasonally lower. Management cautions that quarterly results are not necessarily indicative of full-year results.
Key Financial Results
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $24.86 million | $28.30 million; down 12.2% |
| Net premiums written | $21.51 million | $24.96 million; down 13.8% |
| Operating expenses | $22.28 million | $25.93 million; down 14.1% |
| Income before tax | $2.58 million | $2.37 million; up 9.0% |
| Net income attributable to the Company | $1.81 million | $1.73 million; up 5.1% |
| Basic / diluted EPS | $0.94 / $0.93 | $0.86 / $0.86 |
| Combined after-tax profit margin | 7.3% | 6.1% |
| Operating cash flow | $1.51 million | $(0.41) million |
Revenue pressure reflected lower premiums and modestly lower investment income and other revenue; net realized investment gains were $150,000 versus $15,000. Lower expenses—especially agent commissions and claims provision—more than offset the revenue decline. The claims provision fell to $16,000 from $787,000, which management attributed primarily to favorable recent policy-year experience; the lower provision rate meant approximately $662,000 less in reserves than at the prior-year rate. Salaries and benefits and office occupancy costs increased.
At March 31, 2016, total assets were $207.34 million, total liabilities $63.93 million, and stockholders’ equity $143.41 million. Cash and cash equivalents were $21.87 million; investments totaled $160.40 million, including $7.52 million in short-term investments. No debt balance is presented on the consolidated balance sheet. The claims reserve was $37.40 million, of which $32.43 million was for incurred-but-not-reported claims. Cash increased $84,000 during the quarter. Capital expenditures were approximately $701,000; the Company repurchased 18,795 shares for $1.63 million and paid $309,000 in dividends ($0.16 per share).
Material Changes and Management Commentary
- Policies issued declined 7.9% to 44,535. Management cited lower transaction volume, partly offset by a mix more weighted to higher-margin purchase business.
- Agency premiums declined 17.2%, mainly due to reduced premiums from several larger agents, particularly a Texas agent acquired by another title insurer in 2015. Home and branch premiums declined 2.3%. Texas premiums fell to $4.45 million from $7.50 million.
- North Carolina premium rates filed by the state rating bureau took effect April 1, 2016. Management expects them to increase North Carolina premium revenue and says the effect may be material; no quantified estimate is provided.
- Management described the economy as gradually recovering. It cited an MBA forecast for 2016 of 10.4% growth in purchase activity and 26.6% decline in refinancing activity; these are third-party industry estimates, not Company guidance. The Company provided no specific earnings or revenue guidance.
- Management believes operating cash flows should meet foreseeable operating needs, while noting dependence on real estate activity, interest rates, claims experience, investment performance, ratings and regulatory requirements. The Company expects to continue share repurchases as circumstances permit.
Risks, Contingencies, and Unusual Items
- Title insurance results are exposed to cyclical real estate and mortgage activity, competition, interest-rate and securities-market movements, regulatory changes, and the risk that claims reserves prove inadequate. Management says estimates may require significant adjustment as experience develops.
- Unconsolidated variable-interest investments had a carrying value of $6.58 million and maximum potential loss of $9.28 million, limited to investment commitments.
- Client escrow/trust deposits and like-kind exchange funds/property are excluded from the balance sheet, but create contingent responsibilities. Like-kind exchange deposits and reverse-exchange property totaled approximately $172.38 million at quarter-end.
- Management considers pending legal proceedings and regulatory audits unlikely to have a material consolidated impact. It reported no material change in previously disclosed risk factors.
- The Company sold its $1.0 million-par auction-rate security during the quarter, recognizing a $75,000 realized gain. It also recorded $42,794 of other-than-temporary investment impairment charges. Remaining unrealized losses were considered temporary by management.
- The Company’s disclosure controls were judged effective as of March 31, 2016. A premium-accounting system upgrade was implemented during the quarter and was not made in response to a control deficiency.
Important Facts for Investors to Verify
- Whether the April 1 North Carolina rate changes produce the expected premium and earnings impact.
- Whether agency premium declines persist, including the effect of the Texas agent relationship and geographic concentration in North Carolina.
- Whether unusually low claims provisions and favorable policy-year development are sustainable, and whether the $37.40 million reserve remains adequate.
- How portfolio values, realized gains or losses, and investment income respond to market and interest-rate changes; note that the filing says ASU 2016-01 is expected to materially affect financial condition and results when adopted, primarily through market-value fluctuations.
- The contingent exposure and safeguards related to client-held funds and the $9.28 million maximum potential loss on variable-interest investments.