Investors Title Company — FY2019 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2019. The company primarily underwrites residential and commercial title insurance through ITIC and NITIC; title insurance represented 92.8% of 2019 revenue. Other activities include exchange, trust, and agency-management services. Results are cyclical and seasonal with real estate and mortgage activity.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total revenue | $183.5 million | $156.3 million | +17.4% |
| Net premiums written | $145.8 million | $138.1 million | +5.6% |
| Income before income taxes | $39.8 million | $27.1 million | +47.1% |
| Net income attributable to the company | $31.5 million | $21.9 million | +43.7% |
| Diluted earnings per share | $16.59 | $11.54 | +43.8% |
| Operating cash flow | $20.9 million | $24.4 million | −14.2% |
The net margin was 17.1%, compared with 14.0% in 2018. Revenue and earnings benefited materially from a $10.3 million gain from changes in the estimated fair value of equity securities, versus a $4.1 million loss in 2018. Title premiums also rose, supported by favorable interest rates, higher home prices, and refinancing activity. The claims provision was $3.5 million, versus a $0.3 million benefit in 2018; agency commissions and personnel expenses also increased.
For Q4 2019, net income attributable to the company was $11.4 million and diluted EPS was $6.00, compared with $0.1 million and $0.07, respectively, in Q4 2018. Quarterly net premiums written were $41.9 million versus $34.0 million. The filing does not provide a clear quarterly revenue figure in the selected quarterly data.
Financial position and liquidity
- At year-end, total assets were $263.9 million, up from $244.3 million; stockholders’ equity was $191.4 million, up from $175.6 million.
- Cash and cash equivalents were $25.9 million; short-term investments were $13.1 million. Total investments were $192.9 million, including $104.6 million in fixed maturities and $61.1 million in equity securities.
- Operating cash flow was $20.9 million; cash increased $7.3 million to $25.9 million. Capital expenditures were approximately $1.5 million.
- The company states it does not carry debt. Adoption of lease accounting resulted in $4.5 million of operating lease liabilities; future undiscounted lease payments were $5.0 million.
- Annual dividends were $9.60 per share, including an $8.00 special dividend, versus $12.20 in 2018, including a $10.60 special dividend. Insurance-subsidiary distributions to the parent without regulatory approval were capped at approximately $20.4 million for 2020; $103.5 million of consolidated equity was restricted from transfer without approval.
Changes, outlook, and risks
- Net premiums increased after a 1.7% decline in 2018. Agency premiums grew 8.7%; home and branch premiums declined 1.6%. Non-title service revenue rose 40.1%, especially from exchange services.
- Equity-security fair-value changes are recognized in income, increasing earnings volatility. This accounting treatment significantly influenced the year-over-year earnings increase.
- Management provided no company-specific earnings or revenue guidance. Citing the MBA’s January 2020 forecast, the filing reported expected 2020 mortgage purchase activity growth of 2.6% and refinance activity decline of 23.5%, with total originations projected to fall 7.4%. These are third-party forecasts, not company guidance.
- Key exposures include real estate volumes and interest rates; geographic concentration in North Carolina (39.1% of premiums written), Texas (18.2%), Georgia (11.2%), and South Carolina (9.4%); claims-reserve estimation; investment-market losses; fraud and defalcation; cybersecurity; regulatory and rate-setting changes; competition; and restrictions on upstreaming insurer capital.
- The $31.3 million claims reserve included $3.8 million for known claims and $27.5 million for incurred-but-not-reported claims. Management considered it adequate, but claims can develop over many years; a three-percentage-point change in the loss ratio was estimated to affect after-tax income by $3.456 million.
- Off-balance-sheet customer funds are notable: $21.5 million of escrow and trust deposits and $214.6 million of like-kind exchange deposits and reverse-exchange property were administered at year-end. These are not company assets, but the company has contingent responsibilities for their disposition. Legal proceedings and regulatory inquiries were not expected by management to have a material impact.
Investor verification priorities
- Assess how much of 2019 earnings growth came from the $10.3 million equity fair-value gain and whether the investment portfolio’s performance is sustainable.
- Review the claims-reserve assumptions, prior-year development, large-claim experience, and sensitivity to loss-ratio changes.
- Monitor housing, refinancing, mortgage-rate, and transaction trends, especially in the four concentrated states.
- Confirm insurer statutory capital, dividend restrictions, and the parent company’s access to subsidiary cash; distinguish unrestricted liquidity from regulated assets.
- Evaluate investment concentration and market exposure: a 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $3.3 million, and a 10% equity-market decline by $6.1 million.
- Track the handling and safeguarding of customer escrow and exchange funds, as well as cybersecurity, regulatory, and agent-related risks.