A Brief Review of Investment in Investors Title Company (ITIC)

 

Background

Investors Title Company is a holding company and trades under the symbol ITIC on the NASDAQ exchange.  ITIC is a small-cap residential and commercial title insurance company that operates as one reporting segment through two companies, Investors Title Insurance Company (ITIC) and National Investors Title Insurance Company (NITIC).  NITIC was acquired in 1983 and had formally been known as Northeast Investors Title Insurance Company.    At a recent market cap in the high 300M range, ITIC has a relatively light trading volume at just under 5000 shares daily.

 

Although ITIC is a small player in the (US) national title insurance market, its ability to generate high margins, a growing presence in regional markets, a family-based ownership structure, generous dividend payouts, and growth patterns are all factors that initially attracted me to invest in this company.   Each factor will be explored in greater detail below in the investment thesis.  This write-up is intended to help solidify my case for investment in ITIC.  I expect this company to perform over a longer-term investment period of 5-10 years and provide an annual return ranging from 5-10%.  The company's stock was purchased at a smaller than normal discount (approx. 20%) to my estimate of fair value, which is primarily based on its book value multiple.  While I’m typically looking for companies selling at deeper discounts, ITIC provides enough downside protection to justify the lower expected returns. 

Investment Thesis

Title insurance is a mandatory part of real estate transactions in the US.  Most buyers of title insurance only become aware of its need through the home buying process.  Since title insurance is tied to real estate transactions, home building and refinancing are directly proportional to the number of policies written and revenues of title insurance companies in the US.  While ITIC’s performance has certainly been influenced by the overall level of activity in home buying (and refinancing), it has been profitable since 1984 in all but two years (1992 & 2008).  In each of the two losing years, the losses were relatively minor at just over $1M.  This performance and a very conservative capital structure provides a reasonable assurance that even under distressed housing market conditions, ITIC is not likely to suffer a solvency crisis. 

Notably, ITIC has continued to grow revenue at an accelerating 10-year growth rate for the past 5 years.  At the same time, net margins have continued to climb to an average of 20%.  While certainly this growth has been fueled by the fall in interest rates over the same period, ITIC has also grown their capital reserves to a very high level.  This high level of cash and short-term investments are expected to cushion any fall in premium revenues caused by rising mortgage rates while protecting the investment from a precipitous price decline during short or extended periods of reduced housing financing activity.  

By plotting ITIC's revenue since 2000 alongside the total mortgage activity (new mortgages + refinances) in the US, it is clear that ITIC’s growth is not purely a function of increased overall activity.  While mortgage originations remained flat in the decade following the 2008 crisis, ITIC’s revenues continued to grow.  While North Carolina is ITIC’s largest market, growth in other states has been a driver for the company revenue in the past 10 years.  

There are two key questions that exist with ITIC.  First, can the company sustain its recent growth trend against its larger and entrenched competitors (Fidelity National Financial, First American Financial, and Stuart Information Services) in the US title insurance market, and secondly, what will be the impact on Investor’s market share and overall company performance when the mortgage market cools or potentially craters?  To address these questions, it is important to understand what competitive advantages ITIC brings to this highly regulated, mature business.  It also depends on whether their cash reserves can be effectively deployed in the future to offset the cyclical downturns.

As a small player, ITIC has significant room for growth.  Authors who have written about the company on Seeking Alpha point to that headroom as an opportunity for growth.  However, in an industry that will increasing rely on technology to reduce cost and meet customer preference within the competitive mortgage business, ITIC may not be able to provide the capital investment in technology necessary to stay competitive.   

I purchased Investors Title as a substitute for holding cash at a time when overvaluation in the stock market is apparent.  Finding small, undervalued companies is increasing difficult as recovery from the pandemic is anticipated.  Due to the recent run-up in small-cap stocks and a move toward higher prices in value stocks, I began searching for a company for my portfolio that was similar to my holding in Vitreous Glass (VCI.V) that pays a special dividend and has extremely high insider/family/founder ownership.  ITIC seemingly meets this target as they have paid a special dividend for the past three (3) years.  Last year’s special $15 per share dividend added to their normal 1% dividend would have returned just over 10% for 2020, based on my average price of $160.  While the payment of a special dividend in 2021 and forward years is far from certain, it does seem that management as founding family members who retain over 20% of the stock are incentized to do so.

Investor’s Title was not significantly undervalued at the time of purchase (Jan-Apr ’21).  However, the relatively low downside risk of this stock provides reasonable protection against permanent capital loss.  The likelihood of a small dividend, the possibility of a special dividend of up to 7-9%, and the ongoing potential for continued revenue and margin growth are all sound reasons for the investment.  However, at this point, I am not adding to my position of ITIC as their recent (Q1/2021) results were at a record level, pushing the stock price near my estimate of fair value. 

 

The Edge – Is ITIC is better than a 50/50 bet?

As write-ups on this site progress, some sections will become standard.  One such section will be why the investment is better than 50/50 (or random selection) bet on the market such as an indexing ETF.  As this concept is core to my overall investment strategy, I will discuss this concept in more detail in a future post.

At this point, I fundamentally see my only edge in the ITIC investment as:

a.)    An ability to invest in this small, unfollowed company status

b.)    A lower return expectation as a cash substitute with its protection from downside risk

c.)    An ability to adopt a longer investment horizon vs. the average market participant

As none of these “edges” are specific enough to provide a significantly higher than market return, the investment in ITIC represents a weak upside case against its strong downside.  My position, therefore, is smaller than it might otherwise be.

In the coming months, I will continue to research & analyze the competitive advantage that has allowed ITIC to grow and assess whether this growth is likely to continue, accelerate or stall.   At the same time, should shares become cheaper, I may look to add to my position if the research yields a favorable growth outlook.