Business context and reporting period
Investors Title Company filed this Form 10-K for the fiscal year ended December 31, 2014. It is a holding company whose sole reportable segment is title insurance; other businesses include tax-deferred exchange, trust and investment management, and agency management services. Title insurance generated approximately 95.5% of 2014 revenue, according to management.
The filing is an annual report, not a standalone fourth-quarter filing. Its unaudited quarterly data reports Q4 2014 net premiums written of $28.85 million and net income attributable to the Company of $2.69 million, or $1.33 diluted EPS; Q4 2013 figures were $29.10 million, $1.81 million and $0.88, respectively.
Key financial metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Total revenue | $123.12 million | $126.25 million | Down 2.5% |
| Net premiums written | $109.96 million | $113.89 million | Down 3.4% |
| Income before taxes | $13.49 million | $21.54 million | Down 37.4% |
| Net income attributable to the Company | $9.65 million | $14.71 million | Down 34.4% |
| Diluted EPS | $4.74 | $7.08 | Down 33.1% |
| Operating cash flow | $9.68 million | $15.30 million | Down 36.7% |
| Assets / stockholders’ equity at year-end | $198.04 million / $137.56 million | $188.31 million / $128.06 million | Both increased |
Consolidated after-tax profit margin was 7.8%, compared with 11.6% in 2013; title insurance segment after-tax margin was 8.5%, compared with 13.0%. Investment income increased to $4.26 million from $3.89 million. Cash and cash equivalents ended the year at $15.83 million, down from $23.63 million; total investments were $159.41 million. The filing’s balance sheet does not list debt.
Claims reserves were $36.68 million at year-end, including $5.36 million for reported claims and $31.31 million for incurred-but-not-reported claims. The company paid $3.91 million in claims, net of recoveries, during 2014. It paid $0.32 per share in dividends, unchanged from 2013.
Material changes versus prior period
- Title orders fell 15.4% to 203,657 and net premiums written declined 3.4%, primarily due to fewer refinancing transactions. Purchase transactions partly offset the decline and typically generated higher premiums per order.
- Texas premiums rose to $40.14 million from $30.62 million; Texas accounted for 36.5% of premiums written. North Carolina contributed 28.4% and was broadly flat in dollar terms.
- The claims provision was an expense of $5.23 million in 2014, versus a $0.57 million benefit in 2013. The 2013 result included a $2.2 million reserve reduction from revised actuarial assumptions and favorable claims development; management said the 2014 provision was about $5.78 million higher than it would have been at the lower 2013 loss-provision rate.
- Operating expenses rose 4.7% to $109.63 million, including higher occupancy and technology-related professional costs. Capital expenditures increased to approximately $2.02 million, mainly for technology, systems and hardware.
- In May 2014, the company acquired the remaining 30% interest in United Title Agency, making it wholly owned; the purchase price was $515,275.
Outlook, commentary and risks
The company provided no specific financial guidance. Management stated that it expected operating cash flows and investment income to meet foreseeable operating needs, while noting results depend on real estate activity, interest rates, claims experience and insurer ratings. Management cited an industry forecast, not company guidance: the MBA projected 2015 mortgage originations to rise 7.2%, with purchase activity up 14.7% and refinancing down 2.7%. The MBA also projected a 4.8% 30-year mortgage rate by Q4 2015.
- Business is cyclical and seasonal, and sensitive to home sales, mortgage availability, rates and refinancing volumes.
- Geographic and distribution concentration are material: Texas and North Carolina represented 36.5% and 28.4% of premiums, while one agent generated 23.6% of net premiums written, up from 16.4% in 2013.
- Claims reserves depend on long-tail actuarial estimates and may require revision. A three-percentage-point change in the loss ratio would affect after-tax income by approximately $2.18 million.
- Insurance regulation limits transfers from subsidiaries: approximately $90.38 million of consolidated equity was not transferable to the parent without regulatory approval. Subsidiaries could distribute up to approximately $9.94 million without prior approval during 2015.
- The investment portfolio is exposed to interest-rate, credit and equity-market risks. Management estimated a 100-basis-point rate increase would reduce fixed-income fair value by approximately $5.0 million; a 10% equity-market decline would reduce equity fair value by approximately $3.9 million.
- Other risks include agent fraud or defalcation, competition, regulatory changes and compliance costs, technology and cybersecurity disruptions, rating downgrades, and possible reform of Fannie Mae and Freddie Mac. New integrated mortgage disclosures were scheduled to take effect in August 2015.
Escrow and exchange funds administered for customers were excluded from company assets but create contingent responsibilities: escrow and trust deposits were approximately $18.67 million, and like-kind exchange deposits and reverse-exchange property totaled approximately $82.48 million at year-end. The company reported no material legal proceedings. Independent auditors issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether premium volumes and title orders stabilized after the refinancing-driven 2014 decline, and whether Texas growth offsets weaker markets.
- How subsequent claims emergence compares with the $36.68 million reserve, particularly the IBNR component and favorable prior-year development.
- Whether the concentrated agent relationship and Texas/North Carolina exposure changed after year-end.
- Actual costs and operational effects of the August 2015 mortgage-disclosure rules and ongoing technology initiatives.
- Liquidity available at the parent company versus regulated subsidiaries, including the 2015 permitted distribution limit, and the status of customer funds administered off balance sheet.
- Whether investment values, interest rates, and insurer financial-strength ratings materially changed after December 31, 2014.