Investors Title Company (ITIC) issues residential and commercial title insurance, which protects property buyers from title defects that could affect the ownership of the property (e.g. prior unsatisfied mortgages, tax liens, assessments, inaccurate legal descriptions). I am writing this on 3/22/11, and the shares closed yesterday at $31.25, which represents a Price to Book of 0.68x, and a Price to Earnings of 11.24. This compares to 0.9x and 14.22 for First American Financial Corporation (FAF) and 0.92x and 8.69 for Fidelity National Financial (FNF), both of which are also engaged in title insurance (though, not exclusively so).
ITIC’s assets, like other insurers, are primarily liquid securities. The float provided by insurance premiums (Note: in title insurance, there is only the single premium paid up front, in relation to the value of the property) is invested by the company. Interestingly, in title insurance, the insurer’s risk of monetary loss is less than the total face value of policies written for two reasons.
- For policies written on behalf of lenders, the amount is reduced and ultimately terminated as the mortgage is repaid.
- For policies written on behalf of the property owner, the policy is terminated once the property is sold, so higher real estate turnover benefits title insurers.
ITIC’s investment portfolio is worth $57/share. For most companies we would look at this (and other current assets) in relation to liabilities as stated on the balance sheet. ITIC’s largest liability is its “Reserve for Claims.” Insurance companies make provisions each year for future claims and subtract actual claims. The difference goes to the Reserve for Claims account. ITIC has, in each year of operation (except for last year), wildly over-provisioned for claims, as you can see by the following chart (Click for full size):
On average, ITIC has over-provisioned for claims by 69.2%. Only last year did the company under-provision relative to its actual claims. From that graph, we can also see that the reserve balance is sufficient to carry the company for 4.51 years (assuming the 5-year average claims continues going forward), without making any further provisions. This isn’t going to happen, and in the meantime that “liability” gets to have its corresponding asset invested for the company’s (and shareholders’) interest.
I should note that one potential drawback for ITIC is that it has geographic concentration, with a disproportionate amount of its revenues coming from North Carolina (~38%), though it does operate in 21 other states.
I think we could safely take half of that ending balance and add it to equity, but in the interest of conservatism, I won’t bother for my valuation. The truth is, it isn’t necessary. The company is trading at a significant discount to its book value, and its book value is made up of highly liquid, tangible assets. The only reason you could justify this company trading at a discount to book value would be if you believed the company was under-provisioning for its future liabilities. I see no evidence to support that. So, we can start with book value as a base value for the company (unlike most other companies, the book value of assets is representative of market value, given the churn in the portfolio meaning new investments are at fair market value). This be $45.53, which is a 45% gain from yesterday’s closing price.
Rather than treating it as being liquidated, we can look at the value of the operations as a no-growth perpetuity (which will take care of the cyclicality of the real estate market). When I complete that analysis using stable margins and a conservative revenue level (which is based on recessionary levels!), I come to a value of $70, which represents a 124% gain. The company has had a loss in just one of the last twelve years, and it was extremely modest relative, and due not to poor underwriting but to losses on its investment portfolio in the 2008 (who among us did not go through this?!).
It is worth noting that the company also pays a (small) dividend.
I believe there is a sufficient margin of safety. If you are interested in this company, I would suggest also reading Ravi Nagarajan’s article here (He presents a graph which also shows some operating ratios for the company over time which show the company rebounding from the recession).
Author Disclosure: Long ITIC