Investors Title Company — FY2015 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2015; comparisons are primarily with FY2014. Investors Title is a holding company whose sole reportable segment is title insurance, representing about 95% of 2015 revenue. Other businesses include tax-deferred exchange, trust and investment management, and agency-management services.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $127.2 million | $123.1 million | +3.3% |
| Net premiums written | $112.5 million | $110.0 million | +2.3% |
| Net income attributable to Company | $12.5 million | $9.6 million | +29.9% |
| Diluted EPS | $6.30 | $4.74 | +32.9% |
| Operating cash flow | $16.9 million | $9.7 million | Higher |
| Total assets | $211.5 million | $198.0 million | +6.8% |
| Company-attributable equity | $142.7 million | $137.6 million | +3.7% |
FY2015 after-tax profit margin was 9.9%, versus 7.8% in 2014; title-insurance segment margin was 10.9%, versus 8.5%. Investment income rose to $4.5 million from $4.3 million, while realized investment results shifted to a $116,000 loss from a $268,000 gain. The company reported $21.8 million cash and cash equivalents, $6.9 million short-term investments, and $160.6 million total investments at year-end. The filing reports no borrowings or debt balance. Claims reserves were $37.8 million, including $32.7 million for incurred-but-not-reported claims.
Fourth-quarter 2015 net premiums were $26.1 million and net income attributable to the Company was $2.20 million, or $1.12 diluted EPS; in Q4 2014, the respective figures were $28.8 million, $2.69 million, and $1.33.
Changes versus prior periods
- Premiums and title-order volume recovered in 2015: orders increased 3.7% to 211,200, following a 15.4% decline in 2014. Management attributed the 2015 improvement to higher purchase and refinance activity.
- Home and branch premiums rose 18.1% to $28.4 million, while agency premiums declined 2.1% to $84.1 million. North Carolina premiums increased; Texas premiums fell substantially, from $40.1 million to $25.2 million.
- Operating expenses were essentially flat year over year. Lower agent commissions and claims provision were partly offset by an 11.2% increase in salaries and benefits and higher occupancy costs.
- Operating cash flow increased to $16.9 million from $9.7 million. Cash and cash equivalents rose by $6.0 million during 2015.
- Net income remained below FY2013’s $14.7 million. FY2013 included a $2.2 million reserve reduction from a change in actuarial estimate, which increased that year’s net income by about $1.45 million after tax.
Outlook, risks and unusual items
- Outlook: The filing provides no company-specific earnings or revenue guidance. Management cited an external MBA forecast for 2016: purchase activity up 12.8%, refinancing down 31.7%, and total mortgage originations down 7.1%; these are third-party estimates, not company guidance. Management said operations and cash generation should meet foreseeable needs, subject to market conditions.
- Concentration: North Carolina and Texas generated 32.8% and 22.4% of 2015 premiums, respectively. One agent generated 10.3% of net premiums, down from 23.6% in 2014; a competing title insurer acquired the agency’s assets in July 2015, and it has no obligation to continue placing business with Investors Title.
- Claims and estimates: Claims reserves depend on uncertain actuarial estimates and may take more than 20 years to settle. A three-percentage-point change in the loss ratio would change estimated after-tax income by about $2.23 million. Management considered reserves adequate; actual outcomes may differ.
- Investments: The company recorded $984,000 in impairment charges on investments and other assets in 2015, including $751,000 on securities. It reported $106.1 million of fixed maturities and $37.5 million of equities; a modeled 100-basis-point rate increase would reduce fixed-maturity fair value by about $5.4 million, and a 10% equity-market decline would reduce equity value by about $3.8 million.
- Regulatory and operational risks: State insurance regulation, CFPB oversight, competition, fraud or defalcation, cyber incidents, technology execution, ratings downgrades, and possible reform of Fannie Mae and Freddie Mac could affect results. The new mortgage disclosure rules effective October 3, 2015 had no material reported financial impact.
- Liquidity and contingencies: About $89.5 million of subsidiary net assets cannot be transferred to the parent without regulatory approval; 2016 subsidiary distributions of approximately $14.4 million were permitted without prior approval. Customer escrow and exchange funds are excluded from the balance sheet, but the company remains contingently responsible for their disposition. Exchange deposits and property totaled approximately $171.0 million at year-end.
- Other items: The company paid $0.40 per share in 2015 dividends and repurchased 75,665 shares during the year. The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective. Legal proceedings were described as not material in aggregate.
Most important facts for investors to verify
- Whether the acquired agent continues to place business with the company, and the resulting Texas premium trend.
- Whether purchase-volume growth offsets the forecast decline in refinancing and total mortgage originations.
- Claims reserve development, particularly IBNR estimates, large claims, and any further favorable or adverse prior-year adjustments.
- Investment portfolio credit quality, equity exposure, impairment judgments, and sensitivity to interest-rate changes.
- Statutory capital and dividend restrictions, and the company’s ability to fund parent-level needs while maintaining insurer ratings.
- Cash generation and capital allocation, including share repurchases, dividends, and technology-related capital spending.