Business Context and Reporting Period
Company: Investors Title Company (ITIC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: The Company is a holding company primarily engaged in issuing residential and commercial title insurance through its subsidiaries, Investors Title Insurance Company (ITIC) and National Investors Title Insurance Company (NITIC). It also provides tax-deferred real property exchange services, investment management, trust services, and title agency management services. The title insurance segment accounted for 94.8% of operating revenues in 2010.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Premiums Written | $61,462,000 | $62,155,000 |
| Total Revenues | $71,309,000 | $71,308,000 |
| Net Income | $6,373,000 | $4,829,000 |
| Diluted EPS | $2.78 | $2.10 |
| Operating Expenses | $62,694,000 | $65,392,000 |
| Investment Income | $3,671,000 | $3,783,000 |
| Net Realized Gain on Investments | $655,000 | ($498,000) Loss |
| Total Assets | $153,485,000 | $146,428,000 |
| Stockholders' Equity | $103,929,000 | $97,259,000 |
| Cash and Cash Equivalents | $8,117,000 | $8,733,000 |
| Reserves for Claims | $38,199,000 | $39,490,000 |
Profit Margins: Net profit margin was 8.9% in 2010 compared to 6.8% in 2009. The title insurance segment profit margin improved to 10.4% in 2010 from 7.7% in 2009.
Material Changes vs. Prior Period
- Revenue Stability: Total revenues remained virtually unchanged year-over-year ($71.3 million), despite a 1.1% decrease in net premiums written. This was driven by a 6.7% increase in purchase transactions offset by a 13.9% decrease in refinancing activity.
- Expense Reduction: Operating expenses decreased 4.1% to $62.7 million, primarily due to a significant reduction in the provision for claims (down from 13.6% of premiums in 2009 to 7.2% in 2010), lower salaries, and reduced occupancy costs.
- Claims Recovery: The lower loss provision in 2010 included a recovery of approximately $1.54 million related to a fidelity bond claim from a prior year defalcation.
- Investment Performance: The Company recorded a net realized gain of $655,000 in 2010, reversing a net loss of $498,000 in 2009. This included impairment charges of $383,000 on auction rate securities.
- Geographic Concentration: North Carolina remained the largest source of revenue, accounting for 38.1% of direct title premiums in 2010 (down from 43.6% in 2009).
Outlook, Risks, and Management Commentary
Management Commentary: Management attributes the improved profitability to expense management and favorable claims experience. The Company anticipates that real estate activity will remain sluggish in 2011 due to foreclosures, tighter lending standards, and high unemployment, though refinancing activity is projected to decrease significantly while purchasing activity may increase.
Key Risks and Contingencies:
- Market Cyclicality: Results are heavily dependent on the volume of real estate transactions and mortgage refinancing, which are cyclical and sensitive to interest rates and economic conditions.
- Claims Uncertainty: Title claims can be complex and long-tail. Reserves are estimates subject to variability based on economic conditions and fraud/defalcation risks, which have increased during the economic downturn.
- Regulatory Environment: The Company is subject to extensive state regulation and the Dodd-Frank Act, which created the Consumer Financial Protection Bureau (CFPB) with broad enforcement authority over the real estate settlement industry.
- Legal Proceedings: A class action lawsuit (Backel v. Fidelity National Title Insurance et al.) alleges price-fixing. The case is currently inactive pending the resolution of a related bankruptcy; the Company believes it is without merit but cannot estimate potential losses.
- Investment Risk: The portfolio includes auction rate securities (ARS) valued using Level 3 inputs. While management believes unrealized losses are temporary, further market deterioration could require write-downs.
Investor Verification Checklist
- Claims Reserve Adequacy: Verify the stability of the 7.2% loss provision ratio, noting the impact of the $1.54 million fidelity bond recovery which artificially lowered the ratio.
- Refinancing Volume: Monitor the projected 66% decrease in refinancing activity for 2011 and its potential impact on premium volume.
- North Carolina Exposure: Assess the risk of a 38% revenue concentration in a single state subject to local economic and regulatory shifts.
- Investment Portfolio Quality: Review the valuation of Level 3 auction rate securities ($5.5 million) and the potential for further other-than-temporary impairment charges.
- Dividend Sustainability: Confirm that statutory restrictions on subsidiary dividends ($65.3 million of equity restricted) do not impede the ability to maintain the $0.28 annual dividend.