Investors Title Company — FY 2017 Form 10-K
Business and period: Fiscal year ended December 31, 2017; the filing also reports quarterly results. The company primarily underwrites residential and commercial title insurance, with smaller exchange, trust, and agency-management businesses. Title insurance generated about 95.6% of revenue. The statements were audited, with unqualified opinions on the financial statements and internal controls.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Total revenue | $161.6 million | $138.5 million | +16.7% |
| Net premiums written | $138.6 million | $120.6 million | +14.9% |
| Income before taxes | $30.3 million | $28.1 million | +7.6% |
| Net income attributable to the company | $25.7 million | $19.5 million | +31.7% |
| Diluted EPS | $13.56 | $10.19 | +33.1% |
| Operating cash flow | $19.9 million | $22.6 million | −11.8% |
- Margins: Company after-tax profit margin was 15.9%, versus 14.1% in 2016; title insurance segment margin was 16.9%, versus 15.0%.
- Tax effect: The 2017 tax provision included an approximately $5.3 million benefit, or $2.82 per diluted share, from revaluing deferred taxes after enactment of the Tax Cuts and Jobs Act. Excluding that benefit, 2017 net income would have been approximately $20.4 million; this is a simple calculation, not a company-reported non-GAAP measure.
- Liquidity and investments: Year-end cash and cash equivalents were $20.2 million; short-term investments were $23.8 million; total investments were $186.5 million. Total assets were $248.9 million and stockholders’ equity was $177.9 million.
- Debt: No note payable appears on the year-end 2017 balance sheet; the $6.0 million note borrowed and repaid during 2016 was not outstanding at year-end 2017.
- Claims: The claims reserve was $34.8 million, including $30.2 million for incurred-but-not-reported claims. Claims provision rose to $3.3 million from $0.2 million in 2016, largely because 2016 had unusually favorable prior-year loss development.
- Capital returns: Cash dividends were $3.75 per share for 2017, including $2.80 in the fourth quarter. The company repurchased 1,333 shares in 2017.
Changes versus the prior year
- Premium growth reflected stronger home sales, higher real estate values, new agents, and North Carolina rate changes, partly offset by lower refinancing activity. North Carolina premiums rose to $53.2 million; Texas premiums were $26.5 million.
- Expenses increased 19.0% to $131.4 million. Salaries and related costs rose 24.4%, and office occupancy and operations costs also increased; management cited acquisition-related staffing and other staffing, inflation, and operating cost increases.
- Investment income declined to $4.4 million from $4.7 million, while net realized investment gains increased to $1.0 million from $0.8 million. The portfolio recorded $25,000 of other-than-temporary securities impairment charges.
- Cash from operations fell despite higher net income, partly due to deferred-tax effects and movements in other assets and taxes payable. Cash and equivalents declined by $7.7 million during the year.
Outlook, risks, and unusual items
- The filing provides no specific company earnings or revenue guidance. Management emphasizes that results depend on cyclical real estate and mortgage activity and can fluctuate with rates, transaction volumes, and property values. The filing cites an industry forecast for 2018 of higher purchase originations and lower refinancing, not company guidance.
- The federal corporate tax rate fell to 21% effective January 1, 2018. The 2017 deferred-tax revaluation benefit is a material, nonrecurring factor in year-over-year earnings comparisons.
- Key risks include claims-reserve estimation uncertainty, fraud or defalcation by agents and settlement providers, competition, regulation and rate approvals, investment-market and interest-rate exposure, cyber and technology disruptions, and dependence on North Carolina and Texas, which accounted for 38.3% and 19.1% of 2017 premiums written.
- Insurance-subsidiary dividends are restricted. About $102.1 million of consolidated equity represented subsidiary net assets not transferable to the parent without regulatory approval; approximately $19.0 million of distributions were available without prior approval in 2018.
- Off-balance-sheet customer funds included approximately $20.9 million of escrow and trust deposits and $185.0 million of like-kind exchange deposits and reverse-exchange property. These are excluded from company assets, but the company remains contingently responsible for their disposition and related obligations.
- Management reported no legal proceedings expected to be material. It recorded $153,667 of intangible-asset impairment and $29,000 of goodwill impairment in 2017. An immaterial classification correction shifted commission revenue from premiums to other revenue for prior years without changing previously reported financial position or results.
Important facts for investors to verify
- How much of 2017 earnings growth is sustainable after removing the $5.3 million tax revaluation benefit, and what the lower 21% tax rate means for future effective taxes.
- Whether claims-reserve assumptions remain adequate, especially the large IBNR component and the effect of changing claim experience.
- Whether premium growth and margins can hold if refinancing declines, real estate activity weakens, or North Carolina and Texas markets soften.
- Investment-portfolio exposure to equity prices and interest rates: management estimated a $4.7 million decline in fixed-maturity fair value from a 100-basis-point rate increase and a $4.7 million decline from a 10% equity-market decrease.
- The liquidity and regulatory implications of subsidiary dividend limits, customer escrow and exchange funds, and the company’s planned capital spending and shareholder distributions.