Investors Title Company — Q3 2012 Form 10-Q
Business context and period: Title insurer and related-services provider; title insurance represented 96.1% of operating revenues in the first nine months of 2012. This unaudited report covers the quarter and nine months ended September 30, 2012, compared with the same 2011 periods unless otherwise noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net premiums written | $29.0 million | $24.0 million | $71.9 million | $63.3 million |
| Total revenues | $32.3 million | $26.1 million | $80.8 million | $69.9 million |
| Income before taxes | $4.7 million | $3.5 million | $11.3 million | $6.8 million |
| Net income attributable to Investors Title | $3.2 million | $2.4 million | $7.9 million | $5.1 million |
| Diluted earnings per share | $1.50 | $1.14 | $3.74 | $2.32 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $5.8 million | $8.1 million |
- Management reported Q3 year-over-year increases of 21.0% in premiums, 23.6% in total revenues and 29.4% in company-attributable net income. For the nine months, the respective increases were 13.6%, 15.6% and 57.1%.
- After-tax profit margin was 9.8% for both the Q3 and nine-month 2012 periods, versus 9.3% and 7.2%, respectively, in 2011.
- Claims provision rose to $2.4 million in Q3 from $0.35 million; nine-month provision was $4.4 million versus $2.3 million. The company attributed the increase to prior-year favorable loss development reversing, higher North Carolina premium mix and related claim experience.
- At September 30, total assets were $170.0 million and total liabilities were $55.9 million. Cash and cash equivalents were $20.0 million, short-term investments $11.2 million, and total investments $130.4 million. The balance sheet presents no borrowings as a separate line item.
- Cash from operations was $5.8 million for the first nine months, down from $8.1 million, primarily due to higher receivables and investment earnings, partly offset by higher net income and timing of payments. Cash increased by $1.9 million to $20.0 million.
- Reserves for claims were $39.0 million, up from $38.0 million at year-end 2011; $33.1 million was incurred-but-not-reported. Stockholders’ equity was $113.6 million, including $9.7 million of accumulated other comprehensive income.
Changes, outlook and risks
- Higher real-estate activity and refinancing helped drive a 14.2% increase in title orders to 176,301 for the first nine months. Home and branch premiums grew 45.5% year to date, also reflecting new North Carolina premium charges. Agency premiums rose 6.1% year to date; Texas premiums declined.
- Operating expenses increased 21.6% in Q3 and 10.3% year to date. Higher claims provision, commissions, personnel costs and technology-related professional and contract labor were key contributors. The effective tax rate increased to 28.7% year to date from 26.2%, mainly due to a higher share of taxable income.
- The company acquired a 70% interest in Michigan-based United Title Agency on April 2, 2012. Acquisition consideration was valued at $1.04 million, including $691,250 of estimated contingent payments; the remaining 30% is subject to purchase options and certain mandatory-purchase provisions. The filing reports $550,193 of redeemable noncontrolling interest and $1.45 million of net intangible assets; no goodwill was recorded.
- Management said it expects internally generated funds, subsidiary distributions and liquid investments to meet foreseeable operating needs, while noting results depend on real-estate activity and other factors. The filing provides no company-specific earnings or revenue guidance. It cites an external MBA forecast for 2012 mortgage originations and expects refinancing activity to decline into 2013.
- Key risks include real-estate and mortgage-volume cyclicality, concentration in North Carolina and Texas, competition, regulation, claims-reserve uncertainty, fraud-related losses and investment-market or interest-rate changes. Management cautioned that reserve revisions may be significant.
- A title-insurance class action in West Virginia alleges inadequate rate oversight and rate fixing; it is inactive pending resolution of a related bankruptcy. The company considers the case without merit, intends to defend it, and says a potential loss range cannot currently be estimated. Escrow and exchange deposits are off balance sheet, but the company has contingent responsibilities for their disposition. Like-kind exchange deposits and reverse-exchange property totaled approximately $36.5 million.
- Student-loan auction-rate securities had $3.0 million par value and $2.8 million fair value at September 30; auctions remain illiquid. Management said it believes it has sufficient capital to provide liquidity as needed. The shareholders’ rights plan was amended after quarter-end, extending its expiration to October 31, 2022 and increasing the exercise price to $220 per right.
- Management concluded disclosure controls were effective as of September 30, 2012; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether higher title-order volume and refinance activity persist, particularly as refinancing is forecast to decline.
- Claims experience and reserve adequacy, including the effect of North Carolina business mix and future loss development.
- Receivables growth, operating cash-flow conversion and the quality and liquidity of investment assets, especially auction-rate securities and other Level 3 valuations.
- Final contingent consideration and any exercise of purchase rights relating to United Title Agency.
- Developments in the West Virginia class action and any changes to regulatory constraints on subsidiary distributions.