Investors Title Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017 unless noted. Investors Title is primarily a title insurer; title insurance accounted for 94.8% of revenue in the quarter. Results are seasonal and sensitive to real-estate and mortgage activity.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $33.8 million | $37.8 million | Down 10.6% |
| Net premiums written | $29.6 million | $32.7 million | Down 9.7% |
| Operating expenses | $28.6 million | $31.3 million | Down 8.9% |
| Income before taxes | $5.2 million | $6.5 million | Down 19.0% |
| Net income attributable to the Company | $4.2 million | $4.5 million | Down 6.7% |
| Diluted EPS | $2.20 | $2.36 | Down 6.8% |
| Operating cash flow | $(0.5) million | $2.4 million | Lower by $2.9 million |
Management reported an after-tax profit margin of 12.4%, compared with 11.8%. The effective tax rate was 20.1%, versus 30.8%, reflecting the lower federal corporate rate and tax-exempt income. Dividends paid per share doubled to $0.40 from $0.20.
Financial position and liquidity
- At March 31, 2018, cash and cash equivalents were $22.2 million; investments totaled $180.4 million, including $21.1 million in short-term investments, $100.4 million in fixed maturities, and $47.3 million in equity securities.
- Total assets were $244.7 million and stockholders’ equity was $180.1 million. Total liabilities were $64.6 million, including a $32.8 million claims reserve. The balance sheet lists no borrowings or debt; it does include deferred taxes and other liabilities.
- Cash increased $2.0 million during the quarter. Operating cash flow was negative, principally reflecting changes in claims provision and the timing of tax and accounts-payable disbursements; investing activities provided $3.3 million and financing activities used $0.8 million.
- Management said the company maintains substantial liquidity and believes operating cash flows will meet foreseeable operating needs, while noting results and cash generation depend on real-estate activity and other risks.
Changes, outlook, and risks
- Premium volume fell in both agency and home-and-branch channels, primarily due to lower refinance activity following higher mortgage rates. Agency net premiums declined 10.7%; home-and-branch premiums declined 7.2%. Lower escrow and title-related fees also weighed on revenue.
- Personnel expenses rose to $11.3 million from $10.0 million, driven by salary and benefit inflation, staffing, and technology-related contract labor. A $1.4 million claims benefit, compared with a $0.7 million claims provision in the prior-year quarter, partly offset weaker revenue. Management attributed the benefit to favorable claims experience and reduced estimates for certain previously large claims.
- Adoption of accounting guidance effective January 1, 2018 moved equity-security fair-value changes into net income. The quarter therefore included a $0.6 million unrealized equity-investment loss; the filing says it was driven by general market conditions. This accounting change affects period comparability. Revenue presentation was also expanded, with no effect on reported results. Accounting-standard adoption adjustments reclassified amounts between retained earnings and accumulated other comprehensive income.
- The filing provides no company-specific earnings or revenue guidance. Management cited an MBA forecast for 2018 mortgage originations: purchase activity up 5.6%, refinancing down 27.0%, and total originations down 5.8% versus 2017. These are third-party projections, not company guidance. Management noted that higher rates, housing supply constraints, real-estate cycles, regulation, competition, technology and investment-market movements may affect results.
- Claims reserves are estimates subject to variability; $29.1 million of the $32.8 million reserve was for incurred-but-not-reported claims. Management considered the reserve adequate but cautioned that estimates may change as information develops.
- Escrow and trust balances are excluded from company assets, but the company remains contingently responsible for their disposition. Like-kind exchange deposits and reverse-exchange property totaled approximately $149.5 million at quarter-end, also excluded from assets, with related contingent responsibilities. Management said pending legal matters and regulatory audits were not expected to have a material impact.
Important facts for investors to verify
- Whether title-premium trends, particularly refinance volume and regional exposure, improve or continue to weaken.
- Whether the favorable claims benefit is repeatable and whether reserve assumptions remain adequate as claims develop.
- How equity-market movements and the new fair-value-through-earnings accounting affect reported income and comparability.
- Whether operating cash flow recovers after the quarter’s timing-related outflows, and how dividends, repurchases and technology spending affect liquidity.
- The scale and handling of excluded escrow and exchange balances and the associated contingent obligations.