Investors Title Co
Cheap title insurance company based on profits with strong and smooth momentum
Investors Title Company (ITIC) (SEC filings) provides title insurance to owners and mortgagees. Title insurance covers for the risk of property ownership being questioned. It insures buyers against the risk the seller does not have absolute ownership. Usually lenders require such insurance.
This is a good stock from my strategy with cheap stocks based on earnings multiples, smooth momentum and not too high volatility. From backtesting research of Wesley Gray, James O’Shaughnessy and Pim van Vliet it follows such stocks have excellent risk adjusted returns.
See the annual report over 2020, the proxy/circular for the annual meeting and last quarterly report (30 September 2021).
About 3/4 of the net premiums written were from North Carolina, Texas, Georgia and South Carolina (page 25 of the annual report). About 3/4 of the premiums came from agencies.
Red flag: The CEO is also the chairman. His name is J. Allen Fine, 86 years old. His 2 sons are the only other executive directors. One of the is CFO. The danger of having all these roles fulfilled by close relatives is deficiencies in internal control.
More red flags (page 10-12 of the proxy statement): One of the other directors is already 87 and already in the board since 1982. Another 80 year old director serves the company already since 2008, so more than 10 years. Two of the 3 directors that are still relatively young have busy daytime jobs.
In the annual report (page 35) the auditor mentions the following critical audit matter: "Reserve for claims". Red flag: the company already uses the same auditor since 2004. I think that most auditors act less independently when it is serving the same client for such a long time.
During the last 5 years the company has been paying substantial but varying dividends. Before that the company paid much lower dividends but also did small but substantial repurchases. During the last 4 quarters the company returned 8% of its current market cap through dividends.
Apart from a small quarterly dividend the company usually declares a special dividend once a year. Because of a large dividend payment of 18.46 USD including a special dividend of 18 USD, after the last balance sheet date, the stock is more expensive than it seems.
Multi-year metrics for judging earnings quality and asset allocation are much better than average. Because the score on Financial Strength is mediocre the stock is not in the low EV/EBIT + quality lists.
The balance sheet is strong with low leverage. Because the company does not distinguish assets and liabilities between current and non-current we do not know the current ratio. From a more detailed inspection of the balance sheet I think most liabilities can be put in the current category. Furthermore, there are slightly more cash and short-term investments (money market funds, page 16 of quarterly report) than total liabilities. I estimate the current ratio at 1.5 or more. I do not see any financial distress here.
Unlike other insurers this company does not use substantial leverage. I think this is because the company invests its premiums somewhat differently. A substantial part of the premiums is invested in common stocks (page 16 of quarterly report), which are more risky than the usual investments in debt instruments.
Substantial shareholders: Markel Corporation 11.26%, the chairman and CEO J. Allen Fine 10.37%, executive director W. Morris Fine 9.44%, executive director and CFO James A. Fine 9.42%, Groveland Capital and affilliates 5.90%, BlackRock 5.7%, Dimensional Fund Advisors 5.00%. Part of the stake of each brother is 95k shares held by a limited partnership with the other brother as general partner. Together the brothers control about 14%. On 1 April 2021 at least 2 of the other 6 directors own more than 1 million USD in shares.
I have found a peculiar insider transaction. One of the directors, Tammy Coley, destroyed a lot of value by exercising options early (without selling the new shares). She only got appointed in 2020. Therefore, I think she tried to satisfy a minimum share holding requirement for directors while investing as less as possible cash in the shares.
Related party transactions: The company owns stakes in some of the agencies it does business with. I do not think there is anything to see here.
In 2020 the 3 executive directors earned between 1.3 and 1.4 million USD each, including a bonus of 900k USD each. There was no share based compensation for the executive directors (only for non-executive directors).
When the CEO/chairman dies while employed his family gets 3 times his 3-year average compensation, so about 4-4.5 million USD. There is a similar agreement for the 2 sons. See page 22 of the circular. I think this agreement, without a maximum age, incentivizes these 3 people to stay in a high position at the company until they die. I do not think that is right. Therefore, I consider this agreement a form of self-dealing. Moreover, I do not believe the executive chairman/CEO still spends a lot of time and energy in the company, at his age. Instead I suppose his 2 sons do all the work.
My take on Investors Title Co
Cheap and well managed US property title insurer based on quality and earnings metrics. Strong balance sheet. Because of board composition and the lack of outsiders among the executive officers there are substantial internal control risks. However I think management behaves according to ethical standards that are as good as those at other American companies, or maybe even slightly better.
Momentum stocks with not too high share price volatility and low earnings multiples have great risk adjusted returns. Therefore, I think this is a good stock for a small position, at its current price of about 196-197 USD. However the effect of momentum does not last long. If you take a position have a look here in about 3 months. Then I will revisit the stock again to see it momentum is still strong and smooth enough to keep the stock for another 3 months.
No position.