The Takeaway: A Q&A With Juan Guzman on the Title Insurance Sector
How has the title insurance sector performed over the past year, and how do you anticipate the sector to perform in 2024?
The title insurance market experienced record activity from 2020 to the first part of 2022, driven by strong housing fundamentals and exacerbated by a highly favorable interest rate environment and a pandemic-generated trend of homeowners relocating for various reasons. However, more recently, the title insurance sector experienced significant challenges due to the dramatic increase in rates and resilient home prices, which significantly reduced refinancings and kept residential buyers and sellers on the sidelines.
While interest rates have come down since peak levels, it’s likely not enough to generate significant movement to topline 2024 growth compared to 2023. However, cost-cutting initiatives of 2023 could result in a more profitable year, and this gives some comfort to industry participants that we are moving past the trough.
What are the biggest opportunities in your sector in 2024?
Continued focus on efficiency and best practices via technology, risk management, vendor relationships, and partnerships will be tremendously valuable to title insurers. In the U.S., the title insurance market is highly fragmented across more than 3,000 counties, making it difficult to standardize processes and employ data to arrive at a blanket solution for the market, especially with residential purchase/resale and commercial transactions. However, in recent years, the title insurance industry has gained a strong amount of attention and investment to make the process more efficient and deliver a better user experience.
Embracing technology, whether through proprietary solutions or off-the-shelf options, can be a key differentiator for companies in this industry. For instance, artificial intelligence can enhance efficiency by streamlining policy analysis, misinformation detection, and search engine functions, ultimately speeding up processes and reducing risk for these companies. While some companies continue with traditional methods, some have made notable leaps to accelerate the use of tech-driven solutions to the marketplace. The low volumes experienced in 2023 and likely 2024, as well as cybersecurity concerns, will force even more participants to adopt technology or partner with other title companies that can provide solutions.
What are the key factors driving M&A activity within the sector?
Outside of Doma’s sale of its local agency branches and Essent’s acquisition of Incenter’s title insurance assets, M&A activity in 2023 was primarily characterized by smaller opportunistic transactions, bolt-ons, and acquisitions of additional services or technology. The larger regional/national title companies can weather the storm and are not inclined to sell in the current market given trough levels of activity and unfavorable terms. However, the current market conditions present a unique consolidation opportunity for existing title companies as well as a window for new entrants. While some of the better-performing companies may not be actively seeking buyers today, they are open to investment partner capital to take advantage of the market dislocation. This situation creates opportunities for financial investors to provide capital to engage in these kinds of opportunistic strategic transactions. This market also presents an attractive entry point for strategics tangential to title insurance such as mortgage, real estate, and financial technology companies looking to own their own title insurance captives to gain control over the entire process and customer experience.
While there is a decrease in the number of current deals, buyers and investors are looking for indications that the market has reached its lowest point and that a recovery and normalization are on the horizon. This expectation of market stabilization will likely lead to further activity. While the underwriter market is already pretty consolidated, the independent agent and services segments of the industry remain highly fragmented. In addition to low activity levels, these companies face challenges related to excess capacity and the need to invest in fraud protection, cybersecurity, and other costly measures. Consolidation and collaboration with other players will be crucial for some companies to navigate the current adverse market climate successfully. We anticipate that M&A activity will pick up meaningfully in the second half of 2024 and into 2025.
What is the current level of interest from financial sponsors in this sector?
Over the past decade, there has been a notable shift in the level of interest from financial sponsors in the title insurance sector. Initially, there was limited sponsor interest in this industry. During the years leading up to the recent interest rate hikes, we saw an even bigger uptick in sponsor interest. The primary appeal for this investment lies in the fact that title insurance is a necessary component of the real estate ecosystem, it’s highly fragmented, and the market continues to be ripe for differentiation through technology. WFG is one of the original private-equity-backed companies, but in recent years, we’ve seen Westcor’s sale to The Orogen Group, TRG’s acquisition by Centerbridge Partners, and Futura’s sale to JM Family, among others. However, it is worth noting that although some private equity firms are taking advantage of potential dislocation to enter the market, financial sponsors with existing platforms have been more aggressive in this market than the more opportunistic firms.
So what’s the takeaway?
- The title insurance marketplace is a large, necessary component of the real estate and mortgage market that is ripe for technological innovation and market consolidation.
- The title industry has experienced significant volatility in the past five years, and current anemic activity is a direct result of rapid rate hikes and persistently high home values.
- As rates ease and the industry begins to normalize off the trough 2023 levels, buyers’ and sellers’ comfort with financial projections will grow and the valuation gap will narrow, setting up excellent conditions for pent-up M&A activity toward the end of 2024 and into 2025.
