2024-01-02 01:41:28 ET
Summary
- Investors Title Company is a consistently profitable insurance company.
- It's been growing its balance sheet while its reserves for claims stay flat.
- Sometimes it even pays a special dividend around 10%.
The Investors Title Company ( ITIC ) may seem like an odd pick for folks who are used to insurance companies with flashier mascots like geckos and ducks. As they work in title insurance, some people might wonder what that even is and why it should interest them. Yet, headquartered in Chapel Hill, home of the Tar Heels, this company has quietly been running a steady, profitable business since the 70s.
I'll go into what this business does and explain why, even after the recent rally, shares of ITIC are still a BUY for investors seeking a return through steady, long-term compounding with minimal risk.
Business Model
The company's primary service is writing insurance policies for real estate titles. You might wonder what title insurance is or why it might be needed. I'll quote their own description of their business from their Form 10K :
Title insurance protects against losses resulting from title defects affecting real property. Upon a real estate closing, the seller of real property executes a deed to the new owner, and typically, the property is encumbered with a new mortgage. When real property is conveyed from one party to another, occasionally there is an undisclosed or undiscovered defect in the title or a mistake or omission in a prior deed or mortgage that may give a third party a legal claim against such property or result in the invalidity or unenforceability of the insured mortgage. If a claim is made against the title to real property, title insurance provides indemnification against covered defects.
I'll give an example of a legal claim a third party may have against real property. Suppose an office building had some kind of work done, like getting a window fixed. Imagine the property manager hadn't yet paid the person who fixed the window. That person might now have a claim against the property. Later on, when it's sold, the owner might be totally unaware that this happened, and the new buyer doesn't realize it upon purchasing. If the claim later materializes, that's a cost the new owner would have to eat, and so the insurance protects against that.
Obviously, there are more ways than that for a legal claim to form against different properties, and this makes them hard for buyers to predict. This also means that a risk is posed not only to the buyer but to the lender as well, and so insurance policies are usually sold to them too, creating two sales from one event.
There are some adjacent services they provide that generate additional income, but as we see above, the bulk of their revenues derives from premiums collected on selling new policies.
While they are licensed in several states, most of their business is done in North Carolina, Texas, South Carolina, and Georgia:
With the underwriting profit this generates and the insurance float that it accrues over time, this creates additional capital that the company can invest.
As of last quarter, Investors Title has a portfolio valued just over $220m. The largest chunk is short-term investments (interest-bearing securities that mature in a year or less). They also have other debt securities with longer maturities, along with a chunk of equity investments. This table from 2022's 10K shows what kind of portfolio they have:
As that shows, usually around half of it is essentially cash they keep in money market funds. Most of their bonds appear to come from the public sector, with a few corporate issues. The largest gains can be seen on their common stocks, which usually account for about a fifth of the portfolio. I selected the 10K's table because it shows more detail about the types of companies among their common stocks, the vast majority of it being in industrials.
Financial History
The company has proven history of healthy financial results. I'll break it down for you here, including annual data as far back as 2007 (to see the impact of the Great Recession), along with 2023's YTD data.
Income
Here we can see the company has come a long way in the amount of business it does, with revenues growing from under $100m during the Aughts and over $200m in recent years.
Here as well we can see that the company is consistently profitable, with a narrow exception in 2008. Both revenues and earnings declined in recent years as increased interest rates slowed down real estate purchases and thus policy sales for the company. What about the balance sheet?
Balance Sheet
We see a similar trend here as well. As earnings are accrued and invested into their portfolio, the assets on their balance sheet grow at a faster rate than their liabilities.
Of course, the most important liability is their reserves for claims. Here we can see that's remained a relatively flat amount, despite the growth in sales over the years. Investors Title Company is successfully recording an underwriting profit each year and investing the float for growth. It's almost a $200m gap between their tangible book value and reserves for claims.
Dividends
The company only tends to pay a small portion of its earning as a quarterly dividend. In recent years, though, it's paid special dividends toward the end of the year. These are often substantially higher than the quarterly distributions.
A Look to the Future
Real Estate Cycle
As we move forward, the business will be subject somewhat to cycles in the real estate market, particularly as it affects the states where most of their sales occur (NC, TX, SC, GA). While the long-term trend has been growth, investors should know that it will not always be a straight line. This will follow, to a degree, the interest rate cycle, as a higher rate means folks will be more reluctant to take out a mortgage and thus create a sales opportunity in title insurance.
Expansion
Being focused on four states, the company has the opportunity to expand into many others. Management has not indicated immediate plans for such, and it's likely that any such expansion will depend on the opportunities available.
Fine Family
The Fine Family, who initially formed the company in 1973, is getting into old age, and so investors will want to pay mind to a succession plan. J. Allen Fine is 88 and unlikely to be in charge for a prolonged period of time.
By that same token, a large amount of the company is owned by them directly. We see that they (and some other insiders) account for about 22% of the company ownership here. Thus, what becomes of their shares when they pass away could determine who has a controlling interest in the company and how it is run from that point forward.
Risks
I don't see a lot of risk with this company, given its financial strength, but management states that their insurance market is very competitive, and so it is possible that a bigger player could out-compete them and take their sales. I'll quote the Risk Factors from their 10K
Title insurance underwriters compete for agents on the basis of service, technology and commission levels. Some title insurers currently have greater financial resources, larger distribution networks and more extensive computerized databases of property records and information than the Company. The number and size of competing companies varies in the different geographic areas in which the Company operates, and any reductions to current regulatory barriers within any of the different geographic areas could increase the number of competitors entering into the title insurance market. Competition among the major providers of title insurance or the acceptance of alternative products to traditional title products by the regulatory authorities and the marketplace could adversely affect the Company’s operations and financial condition.
Sampling the 10K further, we see a majority of their sales come from outside agents:
If agents are successfully courted by competition into selling their policies instead, that could pose a huge blow to revenues.
Valuation
Being an insurance company, shares of ITIC need to be valued for the balance sheet and for future earnings that may grow. Currently, the tangible book value is $124.05 per share. This gives us a baseline of what the intrinsic value of the whole company is and thus an idea of how much potential downside there is.
As we can see over the past year's fluctuations, the tangible book value is about as low as the share price gets. Now we just need to figure out how the future earnings add to that value. We'll use EPS since reported earnings include not only the income from their operations but also gains/losses in their portfolio. Then we can just wait and see if we receive those earnings as more assets on the book or as one of those special dividends. Either way, it's a return.
The last five years' EPS averages to about $19.50. Let's assume 3% average annual growth of earnings each year for the next decade, allowing the company to continue its incremental compounding at a very modest rate. We'll use a discount rate of 10%, as that is my standard discount rate.
The discounted value of future earnings comes $138.26. Added to TBV, that gives an intrinsic value for ITIC of $262.31 , suggesting that, even after the recent stock rally, the stock is undervalued.
Conclusion
Investors Title Company is a small insurance company that may easily be overlooked by the average retailer investor because title insurance just isn't interesting to most people. Yet, with its consistent underwriting profit on its insurance and the growth of its portfolio, it should prove to be a steady compounder for the long-term investor. Bountiful years may even result in dividends that yield in the neighborhood of 10%.
Watch the tangible book value to make sure it keeps growing, and keep your eyes peeled for what the Fine Family plans to do as they age. With all that said, ITIC is a safe and easy BUY.
For further details see:
Investors Title Company To Compound Your Wealth