Investors Title Company — Q2 2017 Form 10-Q
Business context and reporting period. The company primarily underwrites title insurance, with title insurance accounting for 95.8% of revenue for the six months ended June 30, 2017. This unaudited filing covers the quarter and six-month period ended June 30, 2017; comparisons are with the corresponding 2016 periods.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $40.1 million | $33.8 million | $77.9 million | $58.7 million |
| Net income attributable to company | $5.68 million | $4.53 million | $10.15 million | $6.34 million |
| Diluted EPS | $2.99 | $2.35 | $5.35 | $3.28 |
| Operating cash flow | Not separately reported for quarter | $5.69 million | $5.58 million |
- Net premiums written were $33.45 million in Q2 and $65.75 million for the first half. Total revenue increased approximately 18.6% and 32.8%, respectively, versus 2016.
- Operating expenses rose 16.5% in Q2 and 27.4% for the first half. Management cited higher commissions and personnel costs, plus expenses from the agency acquired in late 2016. First-half payroll expense increased to $19.64 million from $14.65 million.
- Management reported after-tax profit margins of 14.1% for Q2 and 13.0% for the first half, compared with 13.4% and 10.8% in 2016.
- At June 30, cash and cash equivalents were $29.1 million; short-term investments were $17.8 million. Total investments were $165.9 million, total assets $238.0 million, total liabilities $71.7 million, and equity $166.2 million. The balance sheet lists no debt.
- Cash increased $1.14 million during the first half. Investing activities used $3.50 million, including $1.96 million of property purchases; financing activities used $1.05 million, including $1.04 million of dividends. Dividends paid per share were $0.55 for the first half, versus $0.32 in 2016.
- Claims reserves were $34.14 million, down from $35.31 million at year-end 2016. Approximately $30.04 million was for incurred-but-not-reported claims.
Material changes and notable items
- Premium growth reflected higher real estate transaction volumes, home values, new agents and North Carolina rate changes, partly offset by lower refinancing activity. North Carolina rate changes contributed approximately $2.86 million to first-half premiums, compared with $0.62 million in 2016.
- First-half agency premiums increased 25.3%; home and branch premiums rose 38.4%. Other revenue increased to $9.79 million from $5.19 million, primarily from agency commissions, title fees and earnings of unconsolidated affiliates.
- Investment income declined to $2.21 million from $2.32 million for the first half, attributed primarily to a lower level of fixed-income investments. Net realized investment gains were $0.19 million; there were no other-than-temporary impairment charges in 2017, versus $0.12 million in 2016.
- The company disclosed an immaterial revenue classification correction: commission revenue was reclassified from net premiums written to other revenue. It had no effect on financial position or results of operations.
- The October 2016 Texas agency acquisition cost $10 million plus a $0.918 million adjustment for net cash at closing.
Outlook, risks and contingencies
- No company-specific earnings or revenue guidance is provided. Management said operating results depend on cyclical real estate activity, mortgage lending and refinancing, interest rates, and broader economic conditions. The filing cites an external Mortgage Bankers Association forecast for 2017 of purchase activity growth and lower refinance activity; these are not company guidance.
- Key risks include real estate market and interest-rate volatility, reserve estimation uncertainty, investment losses, concentration in North Carolina and Texas, competition, regulation, and the ability to manage growth and technology. Management stated that claim reserve revisions may be significant.
- Customer escrow and trust balances are excluded from the balance sheet, but the company remains contingently liable for their disposition. Like-kind exchange deposits and reverse-exchange property totaled approximately $213.7 million; the company is contingently responsible for related transfers, disbursements and agreed returns.
- Legal proceedings and regulatory audits were not expected by management to have a material impact. Management reported effective disclosure controls and no material changes in internal control. Insurance subsidiaries met applicable minimum capital, surplus and reserve requirements.
- The filing says ASU 2016-01, effective in future periods, is expected to have a material impact on financial condition and results, primarily through market-driven fluctuations in equity securities. Other listed accounting updates were not expected to have material impacts.
Investor verification points
- Assess whether premium growth is sustainable if refinancing remains weak and real estate activity or home prices soften.
- Track expense growth, especially payroll, acquisition-related costs and commissions, against revenue growth and margins.
- Review claims development and reserve adequacy, particularly the large incurred-but-not-reported component.
- Monitor investment valuations, interest-rate exposure and the future income-statement effect of adopting ASU 2016-01.
- Understand the company’s contingent responsibilities for customer escrow and exchange funds, and the regulatory limits on subsidiary dividends.