Investors Title Company — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company primarily provides title insurance through its underwriting subsidiaries; title insurance represented 95.4% of first-half revenue.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $35.48 million | $33.22 million | $63.78 million | $61.68 million |
| Net premiums written | $30.46 million | $29.85 million | $55.43 million | $54.76 million |
| Operating expenses | $29.70 million | $28.54 million | $55.63 million | $55.64 million |
| Income before taxes | $5.79 million | $4.68 million | $8.16 million | $6.04 million |
| Net income attributable to company | $4.12 million | $3.37 million | $5.85 million | $4.36 million |
| Diluted EPS | $2.05 | $1.65 | $2.90 | $2.14 |
- Q2 revenue rose 6.8% and company-attributable net income rose 22.1% year over year. First-half revenue rose 3.4% and net income rose 34.1%; first-half operating expenses were essentially flat.
- Management reported combined after-tax profit margins of 11.6% for Q2 and 9.2% for the first half, versus 10.2% and 7.1% in 2014.
- Title orders increased 15.6% in the first half to 114,638, while net premiums rose only 1.2%. Management attributed the difference partly to a higher share of refinance transactions, which generally earn lower premiums, and weaker Texas agency premiums.
- Q2 provision for claims was $2.13 million, versus $0.29 million a year earlier. First-half claims provision was $2.92 million, up from $2.67 million. The claims reserve was $38.13 million at June 30, including $32.43 million for incurred-but-not-reported claims.
- Cash from operations was $4.54 million for the first half, compared with cash used of $0.61 million in 2014. Investing activities provided $0.44 million; financing activities used $1.99 million. Cash increased $3.00 million to $18.82 million.
- At June 30, total assets were $200.20 million, total liabilities $60.54 million, and stockholders’ equity $139.66 million. Cash and short-term investments totaled $27.41 million; fixed maturities and equity securities totaled $139.92 million. The balance sheet reports no borrowings or debt balance.
- The company paid $0.16 per share in dividends during the first half and repurchased 24,432 shares for $1.75 million.
Changes, outlook, risks and unusual items
- Investment realized gains were $0.93 million in Q2, versus $0.09 million in Q2 2014. First-half gains were $0.94 million, including $11,149 of other-than-temporary impairment charges. Other comprehensive income was negative $1.83 million for the first half, largely reflecting investment market-value changes.
- On July 1, 2015, another title insurer acquired the assets of Independence Title, a Texas agent that originated 16.0% of the company’s first-half 2015 net premiums. The company expects the agency to maintain its underwriting relationship but cannot quantify the acquisition’s effect; the agent has no minimum-premium commitment.
- Management gave no company-specific earnings or revenue guidance. It cited an industry forecast for increased 2015 purchase and refinance mortgage activity and expected mortgage rates to rise gradually, while emphasizing that real-estate activity and results are cyclical and uncertain.
- Key risks include real-estate and mortgage-volume changes, adequacy of claims reserves, investment-market and interest-rate exposure, geographic concentration in Texas and North Carolina, reliance on a major agent, regulation, and technology and cybersecurity risks. Exchange deposits and reverse-exchange property of approximately $126.37 million are excluded from the balance sheet, but the company remains contingently responsible for their disposition and related obligations.
- Management said legal proceedings and regulatory inquiries were not expected to have a material effect. Disclosure controls were assessed as effective, and no material change in internal control was reported. Management believes operating cash and liquid investments are adequate for foreseeable needs, subject to insurance-subsidiary dividend restrictions and business conditions.
Important facts for investors to verify
- Whether Independence Title continues to place business with the company after its July 1 acquisition, and the resulting effect on Texas premiums and commissions.
- Whether the elevated Q2 claims provision and the $38.13 million claims reserve remain adequate as claims experience develops.
- Whether title-order growth converts into premium growth, considering refinance mix, average transaction values, and agent-channel trends.
- How investment valuation changes, interest rates, and the company’s ability to realize securities values affect earnings, accumulated comprehensive income, and liquidity.
- Whether the contingent responsibilities associated with $126.37 million of exchange deposits and property, as well as regulatory limits on subsidiary distributions, affect available capital or cash.