Investors Title Company — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial amounts are in U.S. dollars; figures are in millions unless stated otherwise.
Business context
Investors Title primarily underwrites title insurance through ITIC and NITIC. Title operations accounted for 92.6% of revenue for the first nine months of 2019. Premium volume is exposed to real estate sales, mortgage originations and refinancing, interest rates, and seasonal market patterns.
Financial performance
- Q3 revenue: $47.9 million, down 0.7% from $48.3 million. Net premiums written rose 1.9% to $40.2 million; non-title services revenue increased to $2.5 million from $1.8 million.
- Q3 earnings: Net income attributable to the Company was $8.0 million, down 25.2% from $10.6 million. Diluted EPS was $4.20 versus $5.61. After-tax profit margin was 16.6% versus 22.0%.
- Nine-month revenue: $130.6 million, up 5.4% from $124.0 million. Net premiums written were nearly flat at $103.9 million; non-title services revenue rose to $7.4 million from $5.1 million.
- Nine-month earnings: Net income attributable to the Company was $20.1 million, down 7.7% from $21.8 million. Diluted EPS was $10.59 versus $11.47. After-tax profit margin was 15.4% versus 17.5%.
- Expenses and claims: Operating expenses increased 6.2% in Q3 and 8.2% for the nine months. Nine-month claims provision was $3.6 million versus $0.2 million, principally reflecting more favorable claims experience in the prior-year period. The claims reserve was $31.8 million at September 30, including $28.2 million for incurred-but-not-reported claims.
- Investment effects: Equity-security fair-value gains were $0.4 million in Q3 versus $2.9 million, but $6.2 million for the nine months versus $2.6 million. Net realized investment gains were $1.2 million year to date versus $0.6 million.
- Cash flow: Nine-month operating cash flow was $10.0 million, down from $15.3 million. Investing activities provided $17.6 million versus $3.7 million; financing activities used $2.3 million in both periods, mainly dividends.
- Liquidity and capital: Cash was $44.0 million, short-term investments $21.7 million, fixed-maturity securities $85.0 million, and equity securities $55.8 million. Total assets were $266.1 million and stockholders’ equity $195.9 million. The Company states it carries no debt; operating lease liabilities were $4.6 million.
- Shareholder returns: Dividends paid during the first nine months totaled $2.3 million ($1.20 per share). The Company repurchased 66 shares year to date and none in Q3.
Material changes versus the prior period
- Year-to-date revenue grew despite essentially flat premiums, supported by non-title services and higher equity-security fair-value gains.
- Profit declined year to date as operating expenses and claims provisions increased. Q3 revenue was slightly lower, and Q3 net income fell more sharply, in part alongside lower equity-security fair-value gains.
- Cash and cash equivalents increased from $18.7 million at December 31, 2018 to $44.0 million at September 30, 2019. The Company adopted lease accounting in 2019, recognizing $4.6 million of right-of-use assets and $4.6 million of lease liabilities; management reported no material income-statement or cash-flow impact.
- Accumulated other comprehensive income increased to $3.2 million from $0.9 million, primarily reflecting unrealized investment gains.
Outlook, commentary, and risks
- The Company gave no specific earnings or revenue guidance and cautioned that interim results are not necessarily indicative of full-year results.
- Management cited lower mortgage rates as supporting refinance activity and Q3 premium growth. The MBA forecast discussed in the filing projected 2019 mortgage originations to increase 17.9% from 2018, then decline in 2020; these are industry forecasts, not Company guidance.
- Key exposures include real estate and mortgage-market cycles, interest-rate and investment-market movements, claims-reserve estimation, fraud-related losses, competition, regulatory changes, technology and cybersecurity risks, and reliance on North Carolina, Texas, and Georgia markets. The filing reported no material change in previously disclosed risk factors or market risks.
- The Company says legal proceedings and regulatory examinations are not expected to have a material effect. It also administers customer escrow and trust funds and exchange-related deposits and property that are excluded from its balance sheet but carry contingent obligations. Like-kind exchange deposits and reverse-exchange property totaled approximately $197.8 million at quarter-end, down from $308.7 million at year-end 2018.
- Unconsolidated variable-interest investments had a reported maximum potential loss of $17.4 million, limited to investment commitments. Management considers the claims reserve adequate but notes estimates may change significantly as information develops.
Important facts for investors to verify
- Whether premium growth and higher non-title revenue can offset increased operating costs and claims provisions.
- How much future earnings depend on market-driven equity-security gains, which fluctuated significantly between comparable periods.
- Claims-reserve adequacy, including the large incurred-but-not-reported component and the effect of future loss experience.
- The nature and servicing of contingent obligations tied to customer escrow and exchange funds, including the substantial amounts excluded from reported assets.
- Whether real estate, refinancing, interest-rate, regulatory, and geographic-concentration risks change materially after the reporting date.