Investors Title Company — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The company primarily underwrites title insurance; title insurance generated 95.3% of total revenue. This annual filing also reports fourth-quarter results.
Financial performance and condition
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $138.5 million | $127.2 million |
| Net premiums written | $122.1 million | $112.5 million |
| Income before taxes | $28.1 million | $17.8 million |
| Net income attributable to the Company | $19.5 million | $12.5 million |
| Diluted earnings per share | $10.19 | $6.30 |
| Operating cash flow | $22.5 million | $16.9 million |
| Total assets | $228.9 million | $211.5 million |
| Stockholders’ equity | $155.1 million | $142.8 million |
- Revenue increased 8.9%; net income attributable to the Company rose about 55.8%. The reported after-tax margin was 14.1%, up from 9.9%.
- Net premiums written grew 8.6%, reflecting higher property values and transaction activity, North Carolina rate changes, and business growth. A North Carolina rate filing contributed an estimated $3.95 million to 2016 premiums.
- The provision for claims fell to $0.24 million from $4.48 million, or 0.2% of premiums versus 4.0%. Management attributed the decline primarily to favorable development of prior policy years and fewer new claims; this materially boosted earnings.
- Investment income was $4.68 million; net realized investment gains were $0.77 million, versus a $0.12 million loss in 2015. The company recorded $0.23 million in investment impairment charges.
- At year-end, cash and cash equivalents were $27.9 million, short-term investments $6.6 million, and total investments $160.9 million. Total liabilities were $73.8 million, including a $35.3 million claims reserve. The company had no outstanding balance on its acquisition loan at year-end.
- Fourth-quarter 2016 net premiums were $34.3 million, net income attributable to the Company was $5.05 million, and diluted EPS was $2.67. In fourth-quarter 2015, these were $26.1 million, $2.20 million, and $1.12, respectively.
Material changes and unusual items
- In October 2016, a subsidiary acquired Texas title agency University Title for $10 million plus a $918,000 adjustment for net cash. A $6 million bank loan partially financed the transaction and was repaid in December. The acquisition contributed 0.9% of consolidated revenue in 2016; the acquired company was excluded from the year-end internal-control assessment.
- Salary, benefit, and payroll costs rose 11.9%, partly due to incentive compensation, higher staffing, and the acquisition. Agent commissions increased 2.4%.
- The company repurchased 66,803 shares for an average $93.10 per share and paid $0.72 per share in dividends, up from $0.40 in 2015.
- North Carolina and Texas generated 35.5% and 20.5% of title premiums, respectively. One agent accounted for 5.4% of net premiums, down from 10.3% in 2015.
Outlook, risks, and contingencies
- The filing gives no company-specific earnings or revenue guidance. Management describes results as dependent on real estate transactions, mortgage rates, refinancing, economic conditions, and seasonal patterns.
- The cited Mortgage Bankers Association forecast projected 2017 purchase mortgage activity to rise 10.3%, refinancing to fall 47.7%, and total originations to decline 17.3% from 2016. These are industry forecasts, not company guidance.
- Key risks include cyclicality in real estate and mortgage activity; concentration in North Carolina and Texas; uncertain, long-tail claims and reserve estimates; fraud or defalcation involving agents and settlement funds; investment-market and interest-rate exposure; regulatory and rate-setting changes; competition; cyber and operational disruption; and possible insurer-rating downgrades.
- A three-percentage-point increase or decrease in the claims loss ratio would change estimated after-tax income by approximately $2.42 million in either direction. Claims reserves include $30.9 million for incurred-but-not-reported claims and may develop differently from estimates.
- A 100-basis-point increase in interest rates was estimated to reduce fixed-income fair value by about $5.3 million; a 10% equity-market decline was estimated to reduce equity fair value by about $4.1 million. The company does not use derivatives to hedge these risks.
- Insurance-subsidiary dividend restrictions limit access to some capital: approximately $88.3 million of consolidated equity was not transferable to the parent without regulatory approval. 2017 distributions permitted without prior approval were estimated at $18.2 million.
- Customer escrow and trust deposits of about $18.0 million, and like-kind exchange deposits and property of about $202.2 million, are off balance sheet; the company remains contingently responsible for their disposition. Legal proceedings and regulatory inquiries were described as not expected to be material.
- The company expects ASU 2016-01 on financial instruments to have a material future impact, principally through market-driven changes in equity-security values. Other newly issued standards were under evaluation, with no material impact expected for several of them.
Important facts for investors to verify
- Whether the exceptionally low 2016 claims provision and favorable prior-year development are sustainable, and how subsequent claims emergence compares with the $35.3 million reserve.
- Whether premium growth and margins persist if refinancing declines, interest rates rise, or North Carolina and Texas property activity weakens.
- The integration, performance, and valuation of University Title, including the acquired goodwill and intangible assets.
- Investment portfolio sensitivity, unrealized gains, and the prospective earnings volatility from adoption of ASU 2016-01.
- Liquidity available at the parent company after statutory restrictions, planned dividends and repurchases, and the contingent responsibilities tied to customer funds.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; University Title was excluded from the internal-control audit scope.