Investors Title Company — Q1 2023 Form 10-Q
Business context and period. The company primarily underwrites title insurance through ITIC and NITIC; title insurance represented 88% of Q1 2023 revenue. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022. Amounts below are in U.S. dollars; financial figures are shown in millions unless noted.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $51.3 | $69.0; down 25.6% |
| Net premiums written | $39.0 | $63.1; down 38.3% |
| Net income | $1.2 | $6.2; down 80.9% |
| Diluted EPS | $0.62 | $3.25 |
| Operating expenses | $49.8 | $61.2; down 18.7% |
| After-tax profit margin | 2.3% | 9.0% |
| Net cash from operating activities | $(13.1) | $1.3 |
| Cash and cash equivalents | $29.6 | $35.3 at Dec. 31, 2022 |
| Total investments | $219.6 | $227.7 at Dec. 31, 2022 |
| Total assets / stockholders’ equity | $323.8 / $241.8 | $339.8 / $241.0 at Dec. 31, 2022 |
Cash, short-term investments, fixed-maturity securities and equity securities totaled approximately $230.2 million at quarter-end. The company reported no debt; lease liabilities were $6.8 million. The claims reserve was $36.9 million, including $33.8 million for incurred-but-not-reported claims. Operating cash outflow reflected, among other items, a $15.7 million decrease in accounts payable and accrued liabilities. Investing activities provided $8.2 million, while dividends used $0.9 million.
Material changes and drivers
- Premiums and escrow/title-related fees fell as higher mortgage rates and housing supply constraints reduced real estate transaction volumes. Direct premiums declined 44.0% and agency premiums 35.1% year over year.
- Non-title services revenue increased to $5.8 million from $2.4 million, primarily due to higher like-kind exchange revenue.
- Interest and dividends rose to $2.1 million from $0.9 million, mainly reflecting higher rates and short-term investment balances. Net realized investment gains increased to $7.2 million from $1.7 million, while the change in estimated equity-security fair value was a loss of $6.8 million versus a $5.9 million loss.
- Lower agent commissions and other expenses partly offset weaker revenue. The claims provision rose to $1.1 million from $0.2 million, mainly because favorable loss development was lower. Personnel expense decreased modestly, but rose to 40.6% of revenue from 30.8%.
- The title insurance segment reported a $2.0 million pretax loss, compared with $8.3 million pretax income in Q1 2022; All Other reported $3.8 million pretax income versus a $0.4 million loss.
Outlook, risks and contingencies
The filing gives no company-specific earnings or revenue guidance. Management said available cash, investments and expected operating cash flows should meet cash requirements over the next 12 months and thereafter, while noting uncertainty around real estate activity, interest rates, inflation, COVID-19 and geopolitical conditions. The cited Mortgage Bankers Association forecast projected 2023 purchase activity down 10.5% and refinancing down 35.2% from 2022; these are external forecasts, not company guidance.
Key exposures include cyclical housing and mortgage markets, concentration in North Carolina, Texas, South Carolina and Georgia, investment-market volatility, possible adverse claims development, regulation, cybersecurity, and the ability to retain agents and key personnel. Management considered the claims reserve adequate, but reserve estimates may change materially as new information emerges. The company recorded $82,000 of fixed-maturity security impairment charges; it attributed remaining unrealized losses on those securities primarily to noncredit market factors and said it did not expect to sell them before recovery.
Legal proceedings and regulatory audits were described as incidental and not expected to have a material effect. The company remains contingently liable for customer escrow and trust deposits and for the disposition of like-kind exchange proceeds and property. Exchange deposits and reverse-exchange property totaled approximately $343.0 million at March 31, 2023, excluded from the balance sheet. Executive benefit and employment-related obligations were approximately $15.0 million. No material subsequent events were reported; management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether transaction volumes and premiums stabilize or continue to weaken, and how higher mortgage rates affect the company’s core title business.
- Whether claims frequency, severity and reserve development support the $36.9 million claims reserve.
- How much reported earnings depend on realized investment gains, equity-security fair-value changes and higher short-term interest income.
- Whether operating cash flow recovers after the Q1 outflow and the large decrease in accrued liabilities.
- The extent of contingent responsibilities associated with $343.0 million of exchange-related funds and property, and the liquidity and regulatory constraints on subsidiary distributions.