Investors Title Company — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The company primarily provides title insurance through its underwriting subsidiaries; title insurance generated 95.1% of nine-month revenue. The interim financial statements are unaudited.
Financial performance and position
- Third quarter: Revenue was $41.0 million, up 18.7% year over year; net premiums written were $36.5 million, up 18.0%. Income before taxes rose to $11.4 million from $6.4 million, and net income attributable to the company rose to $8.1 million from $4.5 million. Diluted EPS was $4.29 versus $2.28.
- Nine months: Revenue was $99.7 million, up 1.4%; net premiums written were $87.8 million, up 1.7%. Pretax income increased to $20.5 million from $14.6 million; company-attributable net income rose to $14.5 million from $10.3 million. Diluted EPS was $7.53 versus $5.17.
- Margins: Management reported combined after-tax profit margins of 19.8% for Q3 and 14.5% for the nine months, compared with 13.0% and 10.5% in 2015, respectively.
- Cash flow: Nine-month operating cash flow was $14.8 million, versus $12.1 million. Investing activities used $2.5 million and financing activities used $7.2 million; cash increased $5.1 million to $26.9 million.
- Liquidity and investments: At September 30, cash and cash equivalents were $26.9 million, short-term investments $3.9 million, fixed maturities $111.0 million and equity securities $39.8 million. Total assets were $223.1 million and stockholders’ equity was $152.1 million.
- Debt: The September 30 balance sheet lists no borrowings. A subsequent acquisition was partly funded with a new $6 million bank loan; see below.
- Capital returns: The company repurchased 66,803 shares for $6.2 million during the nine months and paid $1.0 million in dividends. Nine-month dividends were $0.52 per share, versus $0.24 a year earlier.
Changes versus the prior comparable period
- Q3 premiums benefited from higher transaction volume and real estate values, new agents in southeastern markets, and North Carolina rate revisions. The revised rates contributed approximately $1.7 million to Q3 premiums and $2.4 million to nine-month premiums.
- Nine-month agency premiums declined 3.1%, primarily reflecting lower business from several larger agents, including a Texas agent acquired by another title insurer in 2015. Home and branch premiums increased 16.3% for the nine months.
- Claims expense shifted to a benefit: $1.1 million in Q3 and $0.4 million for the nine months, compared with provisions of $0.7 million and $3.6 million, respectively. Management attributed the change to favorable loss development in policy years 2009–2015.
- Q3 operating expenses rose 5.4%, including increases in agent commissions and personnel costs; nine-month operating expenses fell 5.4%, principally due to lower commissions and the claims benefit.
- Nine-month net realized investment gains were $0.6 million, including $0.2 million of other-than-temporary impairment charges. The comparable 2015 period included $0.9 million of impairment charges. Q3 investment results were a $0.4 million gain versus a $0.3 million loss in 2015.
Outlook, risks and unusual items
- The filing provides no company-specific numerical earnings or revenue guidance. Management says results are exposed to seasonal and cyclical real estate and mortgage activity, interest rates, competition, regulation, and the company’s ability to attract and retain agents. Management cited an external MBA forecast for growth in 2016 purchase and refinance activity; this is not company guidance.
- On October 31, 2016, after quarter-end, a subsidiary completed its acquisition of University Title Company, a Texas title agency, for $10 million plus a $918,000 adjustment for net cash at closing. Financing included a $6 million bank loan and cash on hand. The loan bears interest at LIBOR plus 1.752%, matures December 27, 2016, and is secured by company assets. Integration and growth risks are discussed in the filing.
- Claims reserves were $35.5 million, including $30.8 million for incurred-but-not-reported claims. Management considers reserves adequate but notes estimates may change significantly as claims experience develops.
- The company holds $8.1 million in variable-interest-entity investments, with disclosed maximum potential loss of $16.8 million, including uncalled capital commitments. Management states it is not exposed beyond its total investment commitments.
- Escrow and trust deposits and like-kind exchange deposits/reverse-exchange property are excluded from the balance sheet, but create contingent duties. Like-kind exchange deposits and reverse-exchange property totaled approximately $193.8 million at September 30, 2016, versus $171.0 million at year-end 2015.
- Legal proceedings and regulatory audits are described as not expected to have a material effect. Market risk is principally interest-rate risk; the company does not use derivatives to hedge it. Management identified possible reserve inadequacy, investment losses, real estate concentration, regulatory change, and acquisition execution among key risks.
- The company said ASU 2016-01, concerning financial instruments, is expected to have a material effect when adopted, primarily through market-driven fluctuations in reported results. It did not expect material effects from several other recently issued standards it was evaluating.
Important facts for investors to verify
- Whether favorable claims development continues and whether the $35.5 million claims reserve remains adequate as new data emerges.
- The University Title acquisition’s integration, contribution to results, and repayment or refinancing of the $6 million loan due December 27, 2016.
- Premium trends by channel and geography, particularly North Carolina’s contribution and agency exposure, including large-agent relationships.
- Investment portfolio valuation and impairment assumptions, including the potential effects of interest-rate and equity-market changes.
- The scale and terms of contingent customer funds and exchange obligations, and any changes in regulatory requirements or insurer dividend capacity.