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41 Madison Ave.

, 29th FL
New York, NY 10010
T: 347.403.1970

April 25, 2011

Dear Partners:

In the first quarter of 2011, our Partnership returned 6.5%, or 5.2% net of fees. Furthermore, this gain
occurred with less than full exposure, since on average 31% of our assets were held in cash.

S&P 500 2 K.I.F., gross K.I.F., net 3

2008 1 -31.1% -32.6% -32.6%

2009 26.5% 91.9% 82.9%

2010 15.1% 23.8% 18.6%

2011 YTD 5.9% 6.5% 5.2%

Cumulative Return
6.2% 70.5% 53.8%
Since Inception

Annualized Return
2.0% 18.9% 15.0%
Since Inception

1 2008 performance only includes 3/1/08 to 12/31/08, due to fund launch date of March 2008.
2 Performance data of the S&P 500 Index is included to facilitate comparisons between the Partnership’s returns and overall market
performance. Due to the differences among the Partnership’s investment strategies and the securities that compose the S&P 500 Index,
the General Partner cautions potential investors that no such index is directly comparable to the Partnership’s investment strategy. S&P
500 index performance results include the reinvestment of dividends.
3 The results portrayed above are intended to show the investment performance that would have been experienced by a single limited

partner of the Partnership who remained invested throughout each annual or partial year period shown, after the reinvestment of
interest, dividends, and other earnings, and the deduction of costs and the profit allocation that the “General Partner” would have
accrued as of the end of each year. Results are based on the Partnership’s internal books and are subject to adjustment following the
audit of its financial statements. Future investments may be made under different economic conditions and in different securities and
using different investment strategies than were used during the time discussed herein. It should not be assumed that future investors will
experience returns, if any, comparable to those of the Partnership discussed herein. The information given above is historic and should
not be taken as any indication of future performance.

"All We Want Are the Facts, Ma'am"

We sure will give it to you this quarter. At the end of this letter, we provide Partners with a detailed write-
up on our new investment, Investors Title Company (ITIC). Some Partners enjoy a brief summary; others
relish the full scoop. This time we cater to the latter party. (The write-up starts on page three.)

Aside from new investments, the notable positions we closed closed during the quarter were:

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Closed Security L/S Avg. Entry Avg. Exit IRR Comments
Price Price

Aspen Insurance L $28.95 $29.44 +9% We started building a position in Aspen–a seemingly
quality insurance company that traded at a sizable
discount to book value. In addition to the discount, a
soft insurance market is eventually followed by a hard
one, which would be a boon for Aspen. However, after
observing we could develop no edge on this
investment, we decided to allocate our resources

Friedman Industries L $6.76 $9.81 +359% Friedman has processed steel at a profit for two
decades. It buys coil inventory from steel producers,
cuts it to the specs that a customer orders, and makes a
marginal profit by marking up the finished product by
an average of 10%. Friedman at our purchase price
amounted to getting its 3 factories (one of which was
brand new) and 154 acres of land for free. Friedman
also stood to produce substantial earnings in relation to
its market cap the moment steel orders picked back up.
Investors soon realized this; Friedman paid an
extraordinary dividend; the share price popped up and
we exited.

Full House Resorts L $3.08 $4.42 +949% Discussed in 2010 Q4 letter.

PHI, Inc. L $14.90 $19.37 +37% Discussed in 2010 Q2 letter.

U.S. Treasury Bonds S N/A N/A +31% A fine asymmetrical investment. Not much room or
probability for interest rates to go lower, but plenty for
the reverse. However, given our large cash balance that
built up during the quarter, we thought it imprudent to
pay the few hundred basis points to keep this short.


There is no equation that determines the best place to allocate capital. Investment basics are well
documented–P/E, P/BV, ROE, etc. The great investors, however, were exceptional not because they knew
arithmetic better than anyone else. It is why many consider investing an art.

“An art,” philosopher Dr. Binswanger wrote, “is a method, one not reducible to a formula...[it] requires
holding a wide context, selecting essentials, and monitoring success or failure in order to find ways to
improve performance—vs. that which does not. The former is an art; the latter is a rote procedure.”

We think the best investments are found through the fundamental analysis of specific investment
opportunities, and not mechanical number crunching or habitual following of others.

As always, my interests continue to be aligned with yours, with my entire net worth invested in the
Partnership. I look forward to writing to you again next quarter.

Yours truly,

Eric E. Khrom
Managing Partner

Khrom Capital Management LLC
Investors Title Company (NASDAQ:ITIC)
Buy the Stock–Get the Business for Free

We offer as an investment opportunity a company with a $70 million market cap. The big kicker: no one
has yet realized that it has around $75 million in “excess cash” that can be taken out of the company. That
implies the business operations–which produce $6 to $14 million a year–can be purchased by investors
for free.

This business has barriers to entry, which helped produce a multi-decade record of profitability.
Management owns a significant amount of shares. Furthermore, according to a recent SEC filing, we
gather management bought back over 6% of the company’s stock in the 2011 first quarter.

On the face of it, it seems to be an insurance company. Look deeper, however, and you will not call it
insurance. Instead, you will realize this is a business that provides an essential service whose need will
not disappear anytime soon.


Imagine after purchasing real estate, you later find out that there is a prior lien against it. Or a tax
judgement, or a street and sewer assessment, or maybe an utility easement. Or you learn that the deed was
forged, or executed by spouses without the other spouse’s signature. In any of these events, as a buyer of
real estate, you would stand to lose money or the entire property.

That is why real estate buyers purchase title insurance (and why mortgage lenders require it). It eliminates
their risk of loss on a purchased property that later turns out to have a title defect, lien, or encumbrance
against it.

Property issues such as the above are common, occurring in some form in 1 out of every 3 residential real
estate transactions. Title agents and insurers seek to identify all the issues and eliminate them before the
deal closes.

In title insurance, the majority of the premium is used to pay for this upfront process. If done right, most
(though never all) title issues are resolved beforehand. This is why a title insurer’s income statement looks
opposite to that of companies in different lines of insurance:

Typical Insurance Company: $100 Premium ($85) claim losses ($10) SG&A expenses

Title Insurance Company: $100 Premium ($10) claim losses ($85) SG&A expenses

Though the above is a rough and general illustration, it points out the drastically different nature of title
insurance. Rather than being insurance, it is more so a service: the company makes sure a property title is
clear, and then it provides a guarantee that it is.

Typical insurance companies assume risk. Title insurance, on the other hand, seeks to identify risk and
eliminate it from coverage. Because of this risk elimination, the number of claims for title insurers are
relatively few. (And it is cheaper to incur those few claims rather than expend the additional resources to
eradicate all claims.)

This allows an investor to analyze title insurers more as a business selling a service rather than a guess on
current reserves vs. future claims.


In 1972, Allen Fine founded Investors Title Company (ITIC) in North Carolina. At that time, the title
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insurance market in NC was virtually nonexistent, with less than $2 million in premiums written in the
state each year. Allen Fine knew this meant he would have to be as much a businessman as an educator.
He needed to convince mortgage lenders, attorneys and buyers the benefits of title insurance.

Decades later, he proved his competence in both endeavors. Allen Fine grew his company from its first
policy written thirty-nine years ago to the $100 million company it is today–with ITIC underwriting 1 out
of every 4 policies in North Carolina. To this day, he remains CEO of the company, though nowadays his
sons primarily operate it. Together they hold around 26% of the common stock.

Aside from holding a heavy financial stake in ITIC, the Fine’s reputation is also invested into the
company. In North Carolina, this company is the face of the family. Allen Fine is proud of his creation
(and justly so). He has on his office shelf a collection gathered over the years of facts, figures and written
annual summaries about ITIC. He hopes one day the information will be used by someone to write ITIC’s

Though it took the Fines forty years of tremendous effort to build the company, ITIC is still a tiny player
in the United States’ title insurance market. There are four national title insurers that account for 91% of
the country’s market, with the remaining 9% divided up amongst smaller regional players:

#1 Fidelity National 42%

#2 First American 27%
#3 Stewart Information 14%
#4 Old Republic 8%
#9 Investors Title 0.6%
Aggregate of all other regional companies 8%

Do not let the size of the big 4 confuse you with dominance. From 1989 (the farthest for which we have
data) up until today, ITIC has consistently maintained around 0.5% of the national market share. This has
not budged due to the nature of this industry, as we will explain further down.

The key to ITIC, however, is not looking at the company from a nationwide perspective. North Carolina,
not the entire U.S., is primarily ITIC’s market. That is where about half of the company’s business is
conducted. In that state, ITIC is the behemoth (the second largest underwriter, after Fidelity National):


2002 26%
2003 25%
2004 24%
2005 25%
2006 20%
2007 19%
2008 24%
2009 24%
2010 24%

As can be observed from the above data, there have been no inroads into ITIC’s market share.

Generally, title insurance remains an industry without any new major competitors. The business is a
transactional business, built on relationships that must be renewed and revitalized every day. Although the
homeowner (in the case of residential transactions) actually pays the insurance premium, most title
insurers consider the real estate attorney, the real estate broker, or the mortgage broker as the real
customer. They are the ones that essentially decide where to order the title insurance. The purchaser of the
property rarely cares since it is a small but required component of a much more substantial transaction.
Furthermore, title insurance is sold at virtually the same price by all companies.

In North Carolina, there is no price difference in title insurance premiums. The price is set by the state and
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everyone must sell it at the same amount. Essentially, relationships determine who gets business. ITIC
works with thousands of real estate attorneys, amongst other pertinent parties. Once a relationship is
established, there is no incentive to break it (premiums prices are the same for all insurers). That is the
competitive barrier to entry that established title insurers possess.

And ITIC, from all our research on the ground, has a very powerful network and it knows how to build
and retain it.


As discussed at the outset, the main expense in the title insurance business is the work required to make
sure the title is free and clear. This work is done either internally by the insurer or through title agents,
who retain about 70% to 80% of the insurance premium for their services.

The remaining amount of the premium is not yet profits, since a portion must still go towards loss
reserves for the few claims that still arise. Dependent on the state, that loss reserve ranges from 3% to
15% of the premium. This range of 3%-15% exists more so due to differences in premium pricing of
different states rather than loss costs. (E.g., say that in NY, title insurers are allowed to charge an $800
premium on a house that they can only charge a $400 premium for in NC. The claim frequency and
severity in both states is probably the same, and so $50 of the premium would go towards reserves. Given
the difference in the premium price, however, that would equal a loss ratio of 6% on the NY policy and
12% on the NC policy.)

(For those interested in the technicals, North Carolina loss reserves are regulated by statute, which
dictates a title insurer shall initially reserve 10% of the direct premium written. Then, the reserves are
allowed to be reduced annually, over a period of 20 years, pursuant to the following: 20% the first year;
10% for years two and three; 5% for years four through ten; 3% for years eleven through fifteen; and 2%
for years sixteen through twenty.)

This is an industry that has remarkable reserve stability, due to characteristics that we have already
highlighted. Proof of this was witnessed after the real estate bubble burst. Title insurance claims, of
course, did increase because a large amount of foreclosures and falling property valuations tend to surface
title defects and frauds. However, the increased claims experience was not drastic nor overwhelming for
the industry. (As stated before, loss costs are a small percentage of expenses in this business.)

In 2007/2008, ITIC experienced two abnormally large claims of around $6 million. This was due to a
peculiar North Carolina law regarding mechanic’s liens, where a contractor has 120 days to file a lien
against the property for unpaid bills–even if the property was sold to a new owner. That makes the
discovery process for unpaid subcontractors nearly impossible, since future liens cannot come up in the
examination of public records. (Our trip to North Carolina revealed there is legislation talk in regards to
changing the law to prevent these “shadow liens.” Proposed legislation has been drafted and amended as
of March 2011 and more will be known in July. Should any sensible legislation succeed, it would be
beneficial to ITIC.)

Aside from things that ITIC does not have much control over, the company has proven its prudence over
many real estate cycles. This contrasts with companies like LandAmerica that virtually went bankrupt–
they invested escrow funds which needed to remain liquid into auction rate securities that became illiquid.
Or companies that encountered a wave of losses like Stewart Information–they went on a multi-year
acquisition spree and kept little oversight of their title agents, which led to much fraud and embezzlement.

Compared with competitors over the past couple of decades, ITIC also consistently put as much or more
into reserves compared with what it paid out. In addition to that, North Carolina had a less severe real
estate downturn than many other states. And with a generally short foreclosure process in North Carolina
(3 months), we can safely say the majority of bubble-related claims should have already occurred.

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Investors Title has a simple, clean balance sheet:

Cash and investments (mostly government bonds) $138m

Other current assets $11m
Real estate $4m

Reserves for policy claims $38m

Other current liabilities $11m



Here is what the other four giant title insurers trade at:

Tangible Book Value Current Price PRICE/TBV

Investors Title $45.53 $30.00 0.6x

Stewart Information $13.03 $10.20 0.8x
Old Republic $14.89 $13.00 0.9x
First American $10.47 $15.88 1.5x
Fidelity National $7.93 $14.73 1.9x

(The gap in ITIC’s Price/TBV is even wider when you factor in: 1) Stewart’s off-balance sheet liabilities
due to many legal proceedings currently filed against it. 2) ITIC owns real estate, whose market value
seems to be greater than book value. 3) All the above companies, except for ITIC, have title plants as a
major asset on their balance sheet. Dependent on location, title plants often provide little economic
benefit to the companies. In North Carolina, they are virtually nonexistent because there are over 100
counties to deal with. If you were to exclude title plants from the above tangible book values, ITIC’s
valuation gap would become even more startling.)

Average industry multiple = 1.3x

ITIC share price at 1.3x TBV = $59

ROI from current market price of $30 = 96%

Even if ITIC simply traded at TBV rather than the average industry multiple, it would result in a return of
50% from today’s current price. But that is not the crux of our argument–though that by itself is certainly
a strong one, given its tangible book value is primarily made up of cash-like investments (government
bonds and a few blue-chip stocks).


Our argument is one notch better: you are not buying the company just at a substantial discount to book,
but you are virtually getting it for free. This has to do with the fact that ITIC is overcapitalized–or rather,
very overcapitalized. Our talks with people in the industry and an evaluation of the company’s annual
statements filed with the state insurance department confirm this.

Take a look at how much in tangible assets each insurer holds for each $1 of liabilities, and then look at

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Stewart Information: $1.34
First American: $1.29
Fidelity National: $1.41
Old Republic: $1.35

Investors Title: $3.10

All the public title insurance companies, except for ITIC, are virtually identical in their capital structure.
For ITIC to have the industry normal, say, 1.5:1 capital structure, it would need to hold only $75 million
in assets. Considering ITIC currently holds $153 million, the company can take roughly $78 million out
of the business without any impact on its operations. (Even if one wants to use a more conservative 2:1,
ITIC would still be overcapitalized by $53 million.)

To think about this in rough terms, this company has $78 million in “excess cash,” while its current
market cap is $70 million.

The operations of the company are being given to investors for free (actually, it seems they are being paid
to take it). And it is not as if ITIC is burning cash. Last year it made $6 million in profits. (Though if you
take the $78 million of excess capital out of the business, that would have reduced 2010’s investment
income from $4 million to $2 million, and therefore, net income would have been $4 million for the year.)

More interestingly, 2010’s $6 million in net income looks to be trough numbers. This business is
dependent on real estate transaction volume, which is clearly at a low-point. Witness in the chart below
that total title premiums in the United States are currently at 2001 levels, without adjusting for 10 years of


1989 $3.5 2001 $9.1

1990 $3.6 2002 $12.0
1991 $3.5 2003 $15.7
1992 $4.6 2004 $15.6
1993 $5.3 2005 $16.9
1994 $5.4 2006 $16.6
1995 $4.3 2007 $14.3
1996 $5.0 2008 $10.0
1997 $5.6 2009 $9.6
1998 $7.5 2010 $9.6
1999 $8.1
2000 $7.3

This substantial falloff in volume has left many title insurers with operating expenses out of line with
current revenues. Title insurers are reluctant to cut staff (which is their primary expense), since they want
to maintain the skilled labor and relationships for when business returns to normal levels. With ITIC, the
company spent the same on SG&A in 2003 as in 2010, even though it underwrote 38% more in premiums
in 2003. The operating leverage at ITIC is there, and it is waiting to be utilized.

It is important to note that an investment into a title insurance company is not akin to, say, an investment
into a homebuilder or a construction company. The latter is dependent on the economics being conducive
to a growing real estate market; the former is primarily dependent on real estate transaction volume,
whether prices go up or down. We are confident that people will continue to buy and sell real estate–and
that it will be accompanied with a title insurance policy.

A large part of a title insurer’s business also comes from refinancing, since the lender requires the
borrower purchase a new title insurance policy on a new mortgage. Recent low interest rates have caused
a tidal wave of refinancing. This is beneficial to ITIC’s reserves, since a refinancing extinguishes the title
policies that were issued for the previous (and now repaid) loan.

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Refinancing activity will obviously subside once interest rates begin to substantially rise. This would
lower the amount of title orders that ITIC gets due to refinancing. On the other hand, any interest rate rise
would be a big boon to ITIC’s large bond portfolio. (The majority of maturities are less than 10 years).
Each 1% rise at ITIC’s current capital structure should result in about an extra $1 million investment
income that falls straight to the bottom line. Put differently, each 1% increase in interest rates leads to a
17% increase over ITIC’s 2010 income.

ITIC also, like almost all title insurers, has a few coinciding ancillary businesses that make up less than
10% of their revenues and profits. The primary one is the 1031 exchange service that ITIC provides. ITIC
acts as the middleman to facilitate a 1031 real estate transaction that allows the seller of a property to
defer their capital gains tax. Fee revenue from that business has declined because it is nowadays rarer to
have someone with a gain on their real estate. That is bound to eventually change, which will further
boost ITIC’s bottom line.


Management makes it a point not to speak with outside shareholders. This is a family run business, and
for the time being, they seem to want to keep it that way. All the sources we spoke with (including former
employees of the company) have spoke highly of management, both on the caliber of their character and
the competence with which they operate the business.

Though it would certainly be great to have the company distribute over $75 million of excess capital to
shareholders when the current market cap is $70 million, we are not depending on it for our investment
thesis. We are happy to have management continue to run this company as it sees fit. At a $70 million
market cap, you get $6 million of trough earnings ($7 million of free cash flow). You have a tremendous
margin of safety since tangible book value is $104 million, made up of cash-like assets. You have a
management team with a multi-decade track record and a significant equity stake in the business.

There is no reason ITIC should sell at today’s ridiculously low price, especially since all its peers trade at
significantly higher multiples. ITIC is cheap because it is unknown. All our sources (including ITIC itself)
told us we are the first to inquire about this company in detail.

The strongest catalyst to a repricing of ITIC’s shares will be light shined upon a misperceived company,
in a misunderstood industry. The value discrepancy is too large to ignore when the operations of a
consistently profitable company sell for free. Also, management has consistently stated in its shareholder
letters its focus with return on equity. With so much of their own capital invested into ITIC coupled with
the substantial discount at which the stock sells, we expect management to eventually take advantage of it
through a share buyback or increased dividend. This seems to have already taken place, as a recent SEC
filing implies management bought back over 6% of ITIC’s stock in the first quarter. We expect
confirmation of the buyback in ITIC’s Q1 release.


Standard valuation ratios do not quite apply to ITIC, since it has a negative enterprise value. But anyway
you look at it, it comes off cheap:

- The company liquidates at tangible book value = +50%

- Return to industry Price/TBV = +96%
- Current P/E on trough income = 11x; on trough FCF = 10x
- P/E after taking out excess capital = infinite

Major Risks
- ITIC encounters a lawsuit
- Harmful legislation is passed against title insurance

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This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product.
Any such offer or solicitation to invest in Khrom Investments Fund LP (the “Fund”) may only be made by means of delivery of an
approved confidential offering memorandum. Past results are no guarantee of future results and no representation is made that
an investor will or is likely to achieve results similar to those shown. All investments involve risk including the loss of principal.
Performance results in separately managed accounts will be different from the performance results of Khrom Investments Fund

Khrom Capital Management, LLC or affiliated entities (“Khrom”) is not responsible for any liabilities resulting from errors
contained in this communication. Khrom will not notify you of any errors that it identifies at a later date.

An investment in any product managed or offered by Khrom may be deemed speculative and is not intended as a complete
investment program. It is designed only for sophisticated persons who are able to bear the risk of the substantial impairment or
loss of their investment in the Fund. Products managed or offered by Khrom are designed for investors who do not require
regular current income and who can accept a certain degree of risk in their investments.

Khrom Capital Management LLC