Investors Title Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. The company primarily underwrites title insurance. Title insurance represented 95.1% of revenue in the quarter; results are seasonal and sensitive to real estate and mortgage activity.
Financial performance and condition
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue | $28.45 million | $26.85 million (+6.0%) |
| Net premiums written | $24.91 million | $23.93 million (+4.1%) |
| Income before taxes | $1.36 million | $4.75 million |
| Net income attributable to the company | $986,438; diluted EPS $0.48 | $3.38 million; diluted EPS $1.62 |
| After-tax profit margin | 3.5% | 12.6% |
| Net cash from operating activities | $(1.93) million | $1.68 million |
| Cash and cash equivalents | $20.59 million | $23.63 million at Dec. 31, 2013 |
| Total investments | $143.57 million | $142.76 million at Dec. 31, 2013 |
| Total assets / liabilities / equity | $185.33 million / $55.97 million / $128.87 million | $188.31 million / $59.70 million / $128.06 million at Dec. 31, 2013 |
| Claims reserves | $36.47 million | $35.36 million at Dec. 31, 2013 |
| Cash dividends per common share | $0.08 | $0.08 |
The balance sheet lists no debt line item; the filing does not provide a separate debt balance. Operating cash flow was negative primarily due to payment timing for payables and higher claim payments. Cash fell by $3.03 million during the quarter. Management said cash generated from operations and investment income, along with liquid investments, should meet foreseeable operating needs, while noting that actual results may differ.
Material changes and drivers
- Revenue rose 6.0%, but company-attributable net income fell about 71%. Operating expenses increased 22.6%, to $27.10 million.
- The claims provision shifted from a $389,058 benefit in Q1 2013 to a $2.38 million expense in Q1 2014. Management cited several large claims related to older policy years; the higher provision rate added approximately $2.78 million to reserves compared with applying the prior-year rate.
- Agent commissions increased 14.6% to $15.46 million, faster than premiums, partly because a greater share of business came through agents. Agency premiums increased 10.7%, while home and branch premiums decreased 16.5%.
- Title orders declined 20.5% to 45,971, primarily due to lower refinancing, partly offset by more purchase transactions. Purchase business typically carries higher premiums than refinance business. Texas premiums increased to $11.62 million from $4.92 million; North Carolina premiums declined to $6.30 million from $7.53 million.
- Net realized investment gains were $492,137 versus $16,344. The 2014 amount included $502,199 of net gains on sales, offset by $10,062 of impairment charges. Investment income increased to $1.03 million from $920,485.
Outlook, risks, and unusual items
- The company provided no specific earnings or revenue guidance. Management emphasized that Q1 is typically the lowest-activity quarter and that results depend on real estate transactions, mortgage rates, and refinancing volumes.
- Management cited an MBA forecast projecting 2014 mortgage originations down 39.3% from 2013, with refinancing down 62.0%; these are third-party forecasts, not company guidance. The company also discussed rising mortgage rates, regulatory changes, and potential reform of Fannie Mae and Freddie Mac as factors that could affect demand.
- Key risks include claims-reserve estimation and variability, real estate and securities-market conditions, interest-rate exposure, regulation, technology and system risks, and reliance on North Carolina and Texas for a significant portion of premiums. Insurance-subsidiary dividends and transfers to the holding company are subject to regulatory limits.
- A Michigan class action involving title insurers and agents alleges improper transfer-tax assessments. The company considers the case without merit and intends to defend it; management could not estimate a potential loss range. Other proceedings and regulatory inquiries were not expected by management to be material.
- Like-kind exchange deposits and reverse-exchange property of approximately $89.98 million were held off balance sheet at quarter-end; the company remains contingently liable for their proper disposition and related obligations.
- The filing corrected a prior-year cash-flow classification: $22,439 of 2013 excess tax benefits was reclassified from operating to financing activities, with no effect on net income, balance-sheet amounts, or total cash. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the higher claims provision and increased claims reserves persist, and how subsequent claim development affects reserve adequacy.
- Whether premium growth, particularly in Texas, can offset lower refinance activity and continued weakness in title orders.
- How agent commission rates and the business mix affect margins as premiums change.
- Cash generation, claims payments, and the liquidity available after considering investment-market exposure and regulatory restrictions on subsidiary distributions.
- Developments in the Michigan lawsuit, the off-balance-sheet exchange obligations, and implementation costs or business effects of mortgage and settlement regulations.