Insurer's stock price might fall as interest rates rise.

Author:Maley, Frank
Position:Money Matters

If you own a home, chances are you've bought title insurance. Most lenders require it. And if you own a home in North Carolina, chances are good it's from Chapel Hill-based Investors Title Co. (Nasdaq: ITIC). The company had the state's top market share in 2003 at 25%, according to the N.C. Department of Insurance. It has been the state's market leader for the past 20 years, the company says.

Title insurers defend their clients against competing claims for a one-time payment, based on property value, when a loan is made for realestate or refinancing.


For title insurers, the past two years have been among the best. Low interest rates have spurred more home purchases and refinancings. Investors Title cashed in with diluted earnings per share of $4.18 on revenue of $91 million in 2003. Earnings were up 34% from 2002. And 2002 earnings were 35% more than 2001. Its price rose from about $15 a share at the end of 2001 to $35.30 in February. It traded at about $30 near the end of June. With a price-earnings ratio of just 7.4, Investors Title looks like a steal.

But it's not. Real estate is a cyclical business, and it's on the downswing. The average interest rate on 30-year fixed-rate mortgages increased in April, reversing a seven-month downtrend, says the Washington, D.C.-based Mortgage Bankers Association. It expects half as many refinancings this year as in 2003. "With interest rates rising, it's not the best time to be a buyer of a title company," says Mark Dwelle, a Richmond, Va.-based analyst for Baltimore-based Ferris, Baker Watts.

But unlike larger competitors, Investors Title is still expanding. It moved into Missouri in 2003 and Louisiana in 2004. Altogether, the company writes title insurance in 23 states, but 37% of premium revenue last year came from North Carolina.

The company is trying to offset declines in demand by increasing market share. It's adding products, too, by starting Investors Trust Co. earlier this year. "We think it has a lot of synergies with our title-insurance business," CEO J. Allen Fine says." A lot of the people we do title-insurance business with will have trust business that they could do with our trust company, and we think the trust company will generate title-insurance business."

It probably won't be enough in the short run. Investors Title doesn't give earnings guidance, but two analysts who follow it expect EPS to slip to less than $3 this year, largely because of the slowdown in...

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