Investors Title Company — Q3 2011 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2011, compared with the same periods in 2010. The company primarily underwrites title insurance; title insurance generated 95.9% of operating revenues in the first nine months. Growth was driven largely by expansion into Texas.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net premiums written | $23.99 million | $16.75 million | $63.30 million | $42.17 million |
| Total revenues | $26.12 million | $19.16 million | $69.86 million | $49.08 million |
| Income before taxes | $3.46 million | $2.01 million | $6.85 million | $5.03 million |
| Net income | $2.44 million | $1.45 million | $5.05 million | $4.00 million |
| Diluted EPS | $1.14 | $0.63 | $2.32 | $1.75 |
- Q3 net premiums increased 43.2%, total revenues 36.3%, and net income approximately 68.4% year over year. For nine months, increases were 50.1%, 42.3%, and 26.2%, respectively.
- Combined after-tax profit margin was 9.3% in Q3 and 7.2% year to date, versus 7.6% and 8.2% in the comparable 2010 periods.
- Operating cash flow for nine months was $8.07 million, up from $1.85 million. Cash and cash equivalents were $14.69 million at September 30, 2011, versus $8.12 million at year-end 2010. Short-term investments were $21.72 million.
- Total investments were $126.20 million; total assets were $155.50 million and stockholders’ equity was $103.85 million. Claims reserves were $37.55 million. The balance sheet reports no debt line; debt levels are not otherwise discussed.
- Cash used in financing was $5.72 million, including $5.43 million of share repurchases and $0.45 million of dividends. The company repurchased 168,516 shares during the first nine months at an average $32.20 per share.
Material changes and management commentary
- Texas net premiums reached $23.38 million year to date, compared with $0.16 million in 2010. Agency premiums rose 75.9% year to date; agency business accounted for 80.9% of premiums, up from 69.1%.
- Title order volume increased 6.3% year to date, to 154,421. Management attributed premium growth chiefly to Texas expansion and higher-premium markets; home and branch premiums declined amid a stagnant real estate market and weaker refinancing.
- Claims provision rates fell to 1.5% of premiums in Q3 and 3.6% year to date, from 10.9% and 7.7%, respectively. Management cited favorable prior-year loss development and a lower relative share of North Carolina business. The lower year-to-date provision rate resulted in approximately $2.57 million less in reserves than at the prior-year rate.
- Agent commission expense increased 75.6% in Q3 and 90.0% year to date, reflecting agency growth and higher commission-rate markets, particularly Texas. Investment income declined 5.1% in Q3 and 3.3% year to date.
- Management described the economy and real estate market as uncertain and expected sluggish real estate conditions to continue through the balance of 2011. The filing provides no company-specific earnings or revenue guidance.
Unusual items, risks, and contingencies
- Estimate change: A third-quarter study refined the estimate for unreported agency premiums. The change increased Q3 net premiums by approximately $3.00 million and net income by $198,000, or about $0.09 per share, versus the prior estimate. Related commissions, claim provision, premium taxes, and income taxes also increased.
- Claims uncertainty: Most of the $37.55 million claims reserve—$31.67 million, or 84.3%—was for incurred-but-not-reported claims. Management considers reserves adequate but notes estimates may change materially as experience develops.
- Investment exposure: The portfolio includes $4.62 million of Level 3 auction-rate securities, valued using unobservable inputs; auctions had failed. The company also recorded year-to-date impairment charges, and unrealized investment losses may not recover.
- Litigation: A class action alleging title-insurance rate fixing is pending in West Virginia and is inactive pending a related bankruptcy. The company disputes the allegations and cannot reasonably estimate potential losses. Management says other proceedings and regulatory inquiries are not expected to have a material impact.
- Off-balance-sheet obligations: The company administers customer escrow and trust funds and exchange proceeds that are excluded from its assets but for which it remains contingently liable. Like-kind exchange deposits and reverse-exchange property totaled approximately $12.94 million at September 30, 2011.
- Key risks include real estate and mortgage-volume weakness, claims-reserve adequacy, investment-market losses, regulation, competition, and geographic concentration in North Carolina and Texas. Management reported disclosure controls were effective and no material changes in internal control during the quarter.
Investor verification priorities
- Assess how much reported growth and Q3 earnings depended on Texas expansion and the $198,000 estimate-change benefit.
- Review the sustainability of the unusually low claims provision rate and the adequacy of reserves, especially IBNR claims.
- Verify Texas concentration, agency commission economics, and exposure to a persistently weak housing and mortgage market.
- Examine valuation and liquidity risks in auction-rate securities and other investments, plus potential effects of further market declines.
- Monitor the rate-fixing litigation and contingent responsibilities for customer escrow and exchange funds.