INSIGHTS ON INVESTING IN TITLE INSURANCE COMPANIES
hello
I am looking at backing/partnering with a searcher who is evaluating a profitable title insurance company. Seller is looking to retire so clear rationale for exit (and the fact that 2020 was a bumper year for RE deals). Owner is apparently "absentee" with a solid management team in place. Opportunity comes from more aggressive business development.
Would be interested in any experiences or insights on what to think about when assessing the opportunity. Specific questions:
1. what are the biggest risks in such businesses?
2. what are typical multiples in the industry?
3. the industry seems quite fragmented. is that correct and if so why?
thanks everyone
The insurance field including title insurance often operates with large insurance companies who work with smaller local sales offices often independently owned. Title insurance in many ways is the same. There are companies that are called abstract companies (front line sales) and then the large 'underwriters' like Fidelity, Chicago, Steward and a couple of others. There are a few large abstract companies that grew to the point of self-insuring but they aren't typically part of the cross indemnity agreement that the large underwriters have between themselves. I am not a true expert in what hurdles that would represent if you were not onboard with one of the large 'underwriters'
Abstract companies often need an attorney on staff and para-legals familiar with real estate law.
1. Biggest risk are broken down into 2 sections.
A. - Where do they get their sales from? I have been speaking with several associates I do business with and they see many sources of business partnering with, purchasing or starting their own abstract companies. The barriers to entry are not that difficult if you have a secure source of business. Some typical sources of business are real estate attorneys (in attorney states like NY), real estate agents, mortgage banks etc. A lot of abstract companies that are out there often find a way to compensate sources of business. You of course should check state law on how to do so and if you can legally.
B - It is an insurance company. The work insured in providing clean title to the purchaser of the property and lender (mortgage or deed of trust). Abstract companies are often 'on the hook' for a % of loss and the underwriters for the balance. You would want to be mindful of how you acquire the business and ensure at the very least you are indemnified from such a loss of work prior to you acquiring the business.
2. Multiples - I can't provide any more information on multiples then you can find in publicly available information. The insight I have here is that the revenue is not recurring and the deal sources are not typically sticky. It takes very little effort for someone to switch who they are dealing with.
3. The industry is very fragmented when it comes to the abstract companies, however the Big 5 underwriters have a vast majority of the business as I understand it.
I assume you are discussing purchasing an abstract company?