Investors Title Company — Q2 2012 Form 10-Q
Business context and period. The company primarily underwrites title insurance through Investors Title Insurance Company and National Investors Title Insurance Company. This unaudited report covers the three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless noted.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $26.08 million | $23.72 million | $48.49 million | $43.74 million |
| Net premiums written | $23.24 million | $21.45 million | $42.91 million | $39.32 million |
| Income before taxes | $4.62 million | $2.04 million | $6.56 million | $3.39 million |
| Net income attributable to company | $3.35 million | $1.59 million | $4.78 million | $2.61 million |
| Diluted earnings per share | $1.57 | $0.74 | $2.24 | $1.19 |
| Cash dividends per common share | $0.07 | $0.07 | $0.14 | $0.14 |
- Revenue increased 10.0% for Q2 and 10.9% for the first half; company-attributable net income rose 110.0% and 82.9%, respectively. Management reported combined after-tax profit margins of 12.8% for Q2 and 9.9% for the first half, versus 6.7% and 6.0% in 2011.
- First-half operating cash flow was $1.53 million, down from $3.18 million. Cash and cash equivalents were $17.46 million at June 30, down about $0.58 million from year-end. Short-term investments were $8.42 million; total investments were $128.59 million.
- Total assets were $164.10 million and total liabilities $52.23 million at June 30, 2012. Claims reserves were $37.55 million, including $31.29 million for incurred-but-not-reported claims. No borrowings are listed as a separate balance-sheet item.
- Stockholders’ equity was $111.40 million. The company repurchased 14,502 shares during the first half and paid $0.14 per share in dividends.
Material changes and management commentary
- Title orders increased 13.1% to 111,254 in the first half. Management attributed premium growth to stronger real-estate activity, refinancing and purchase transactions, and new North Carolina industry-wide premium charges effective March 1, 2012.
- Home and branch premiums increased 43.2% year to date, while agency premiums rose 0.9%; agency premiums declined 2.3% in Q2, primarily reflecting lower Texas premiums. North Carolina growth was partly offset by weakness in Texas.
- First-half operating expenses increased 3.9%. Higher salaries, benefits and payroll taxes, and professional and contract labor costs—partly related to software development and increased business—were partly offset by lower agent commissions.
- Claims provision was 1.6% of premiums in Q2 and 4.6% year to date, versus 5.7% and 5.0% in 2011. Management attributed the lower rates primarily to favorable prior-year loss development and cautioned that estimates can change as claims experience develops.
- On April 2, 2012, a subsidiary acquired a 70% interest in Michigan agency United Title Agency Co., LLC. The filing reports $1.04 million fair value of total consideration, including $691,250 of estimated contingent payments, and a redeemable noncontrolling interest. United’s results are included from the acquisition date; management considered the transaction immaterial for pro forma disclosure.
Outlook, risks and contingencies
- Management described the U.S. economic outlook as uncertain and expected a sluggish real-estate market for the balance of 2012. It cited an industry forecast for refinancing to decline later in the year; this is not company-specific earnings guidance.
- Results depend heavily on real-estate transactions, mortgage originations and refinancing, interest rates, economic conditions and the company’s concentration in North Carolina and Texas. Other stated risks include claims-reserve adequacy, fraud losses, investment-market losses, regulation, competition, and limits on dividends from regulated insurance subsidiaries.
- Management believed operating cash flows and liquid investments would meet foreseeable needs, while noting that future liquidity depends on market conditions, claims-paying ability and financial strength ratings. Subsidiary dividends and transfers are subject to regulatory restrictions.
- A title-insurance class action alleging rate fixing is pending in West Virginia and is inactive pending resolution of a bankruptcy. The company considers the case without merit, but says it cannot reasonably estimate potential losses. Management considers other proceedings and regulatory inquiries not material based on their current status.
- Customer escrow and trust funds and like-kind exchange deposits and properties are excluded from company assets, but the company remains contingently liable for their disposition. Like-kind exchange deposits and reverse-exchange property totaled approximately $21.96 million at June 30, 2012.
- The investment portfolio includes illiquid student-loan auction-rate securities; their fair value was $3.70 million at June 30. Management said it believed liquidity was sufficient despite auction illiquidity. Unrealized investment losses may not recover, and further market deterioration could result in impairment or realized losses.
Key investor verification points
- Verify the drivers and durability of premium and earnings growth, particularly North Carolina rate changes, refinancing activity and Texas premiums.
- Review claim-reserve adequacy and the sustainability of favorable loss development; most reserves relate to claims not yet reported.
- Assess investment valuation and liquidity risks, including auction-rate securities and securities with unrealized losses.
- Monitor the West Virginia class action, escrow and exchange-related contingent obligations, and regulatory constraints on subsidiary distributions.
- Check the United acquisition’s contingent consideration and noncontrolling-interest figures: the balance sheet lists $469,463, while the note’s reconciliation reports $469,493.
- Confirm cash conversion: first-half net income increased, but operating cash flow declined, primarily due to higher receivables.