Price – $37.18 Market Cap – $78m
Net Cash & Investments on B/S – $35.70
2011 EPS estimate = $3.10
2012 Dividend – $0.28
Investors Title Company (NASDAQ: ITIC) is based in Chapel Hill, North Carolina, Investors Title Company is a holding company for Investors Title Insurance Company and National Investors Title Insurance Company which write policies to protect mortgage lenders and homeowners from unforeseen claims made against title to real property.
Our Margin of Safety
- A $78m company which is has a moat around its business, remains profitable and yet has “excess” cash and investments of at least $75m which could potentially be taken out the business without affecting operations or loss reserves. Essentially we are buying a low risk investment portfolio and getting a profitable family run business for free.
- Buying on a low multiple of trough cyclical earnings a company that has demonstrated its resilience across many real estate cycles.
- Customers are legally obliged to buy their product
Investors Title Company was founded in 1972 by current chairman, CEO and patriarch J. Allen Fine. He has grown the business from nothing to a $80-100m business. Allen Fine earned a Bachelor’s Degree in Accounting and Master’s in Business Administration from the University of North Carolina at Chapel Hill. He is a CPA and began his career teaching accounting at UNC-CH School of Business. In the late 1960?s, Allen made the decision to start a business. He identified the need for title insurance, researched the subject, and in 1972 Investors Title first opened its doors.
Two of his sons, one a qualified CPA and one a CFA, are now also in the business as CFO and as Company Secretary respectively. Between the family and other senior execs they own 26% of the common stock.
ITIC isn’t just the Fine family business in that it puts food on the table; this business is the family legacy in the state of North Carolina. It would seem that they really play on the fact that this is more important to them than just insurance. If so, that’s a good intangible to be invested alongside. Highly specialised, passionate owner operators.
Traditionally a North Carolina based business, the company is expanding aggressively into other states particularly Texas, which has gone from a negligible amount to 37% of revenue in the space of a year!
The Business Model
As I said above, customers are legally obliged to buy ITIC’s product. Let me explain, a purchaser of real estate buys title insurance to eliminate their risk of loss due to title defects, encumberances or liens against their property. In fact, mortgage lenders require title insurance before lending – to protect them from having security over bad assets.
Title insurance protects owners and lenders from myriad potential issues after the completion of a real estate purchase including forgeries, tax judgements and incorrectly executed deeds. Such defects could call into question whether the buyer has clear title to the property. Title insurers are responsible for performing an examination of the land records to ensure that the seller has proper standing to convey ownership to the buyer. In the event that the title proves to be defective at a later date, the title insurer is responsible for covering the resulting losses up to the coverage limit of the policy.
Issues of some sort arise in 1 in 3 residential transactions. The job of the title insurer is slightly different to a normal insurer in that they endeavour to head off these problems BEFORE they arise.
Traditional insurance takes a premium, has a small SG&A expense and a very large reserve against claim losses. Title insurance takes a premium, spends a lot on SG&A expense as it investigates and frees the property from potential problems and liabilities – the loss reserve is comparatively small. By far the main expense in the industry is the due diligence and investigation required to make sure titles are free and clear, this constitutes 70-80% of each premium received or 70-80% of revenue whichever way you want to look at it.
Title insurance is not normal insurance. Insurers seek to assume risk and be compensated for doing so; title insurers look to identify risk and then eliminate it before guaranteeing against their own work. It is a service business, they only compensate if they don’t do their job properly.
Title Insurance seems to be a pretty closed industry with no major competitors entering in the last few years. The business is a transactional one built on relationships between people. There is no price competition between companies as the price is set by the state. Buyers usually take advice from their professional service providers on whom to buy title insurance from. So the realtors and lawyers can allocate business on the basis of whom they have a good relationship with; the Fines at ITIC have been around for 40 years, are local specialists and have had as long as anyone to build up a good network of referrers in their business.
Home or Branch Policies
Title insurance companies typically issue their policies directly through branch offices or through title agencies. In the Company’s home and branch operations, the Company issues the insurance policy and retains the entire premium, as no commissions are paid in connection with these policies. All of the Company’s branch offices are located in North Carolina; as a result, the home and branch office premiums written are primarily for North Carolina policies.
When a policy is written through a title agency, agents retain the majority of the title premium collected, with the balance remitted to the title underwriter for bearing the risk of loss in the event that a claim is made under the title insurance policy. The increase in the percentage of total premiums written by agencies in 2011 is primarily due to the Company’s strategy of growth through expansion of its agency base and the influence of local geographic trends. Agency premiums have become 80% of the business, up from 70% just 12 months ago as they achieve scale outside of North Carolina.
The Size of the Addressable Market
ITIC is a tiny player in the broader American title insurance market. There are 4 national insurers that make up 90% of business written nationally. ITIC has a national market share of only 0.6% due to its traditional, specific focus in North Carolina where they now do around a third of their business and which historically was the source of almost all of their revenue.
Within North Carolina however, ITIC is one of the Big Players commanding around a quarter of the market, a share which has held steady for the last decade.
The Total Title Insurance market in the US was worth about $3.5-4bn per annum in the early 1990’s, and north of $16bn as of the mid 2000’s. In 2010 it was $9.6bn, it doesn’t seem unreasonable to imagine that this might tick back up as the real estate market becomes more liquid again.
It is worth noting that ITIC is primarily dependent on real estate volume not pricing. To be an owner of ITIC one doesn’t have to have a rosy outlook on house prices, merely a belief that at some stage there will be increased activity and when there is the delta to ITIC’s profits will be large. The re-financing market (because it involves new mortgage docs) is also an important part of ITIC’s market, given that rates have been ultra low for 3 years now it’s likely that anyone who could refinance, has refinanced.
From the recent management statement;
“In 2010, refinancing activity accounted for 69.9% of all mortgage originations. In 2011, refinancing transactions are projected by the October 11, 2011 MBA Mortgage Finance Forecast to account for 66.2% of mortgage originations. The projected decrease is attributable to the higher levels of refinance volume that occurred in prior years, as well as reduced available equity and more stringent requirements being imposed by lenders. Despite current mortgage rates falling to the lowest levels in decades, the Company believes that many homeowners would need rates to fall even further to justify the closing costs involved with subsequent refinance transactions.”
The point being, I really think we are looking at trough revenue for the industry and for the company. Despite this, it’s a reasonable 12x earnings.
Positive Business Mix
In the 3rd Quarter of 2010, ITIC began writing business in Texas, the second largest title insurance market in the US. This has already had a positive impact on premium growth.
North Carolina is decreasing as a share of the overall business as it expands into other states. NC premiums are less than half the national average and therefore the resulting loss ratio is always higher for NC than for other states, all other things being equal. This should help to improve margins if they can achieve operational scale in alternate, higher premium states.
From the annual report;
“In a cyclical industry such as ours expense management and operating efficiency are critical. We remain focused on managing expenses with an emphasis on staffing and occupancy costs. In 2010, payroll and occupancy costs decreased by 4% YoY even as we continued to make targeted investments in growth opportunities and