More merger and acquisition activity may be on the horizon0 September 5, 2014 at 4:26 pm by Peter Morris
Two weeks ago, Insurance Thought Leadership (ITL) published an article predicting a surge of merger and acquisition activity in the claims and technology sector. As if on cue, there was an announcement a week later that SCM Insurance Services had acquired the property and casualty businesses of Granite Global Solutions. In discussing the spate of M&A transactions in the claims and technology sector, ITL identified the following drivers:
- The ongoing rationalisation and consolidation within the claims supply chain
- The increased use of ‘big data’ and analytics solutions
- The commoditization of insurance products
- An influx of private equity capital
- An expectation of an improving economy combined with lingering low interest rates
In addition to independent adjusting firms, the claims supply chain includes claims technology vendors, collision and glass repair shops, parts suppliers, rental car providers, medical assessment providers, law firms that specialise in insurance work, towing companies, salvage auctioneers, and private investigation firms. Some portions of the claims supply chain, most notably collision repair shops, consist of many local privately-owned shops with limited technology and a lack of executive management talent.
In his ITL article, Stephen Applebaum, Managing Partner, InsuranceSolutions Group, writes that for smaller providers in the claims supply chain, ‘now may be the time to consider combining with a larger, better-capitalized player, especially given the trend toward vendor management by insurance companies’. In predicting an increase in M&A activity in the claims and technology sector, ITL’s focus was on small, local players. Turning to the SCM/Granite transaction, no one would describe either side as being small or local. Both companies are national multi-location firms with a depth of executive management experience. The majority shareholders for both companies are private equity firms: TorQuest for SCM Insurance Services and Genstart Capital for Granite Global Solutions.
Even though they did not fit the description of small or local suppliers, the firms saw the advantage of combining. In announcing the deal, Larry Shumka, President and CEO of SCM Insurance Services described the transaction as ‘consistent with SCM’s philosophy of building strong, autonomous brands, and a larger, more diverse company will better serve our customers with a portfolio of best-in-class service’. For his part, Murray Wallace, President and CEO of Granite Global Solutions, said ‘SCM brings scale and a focus on leading-edge technology that will make the combined entity a force in the industry, serving both insurance and corporate markets with the best possible solutions’.
As firms in the supply chain combine to form ever-larger corporate entities, it will increase the pressure on their competitors to follow suit. With size comes the opportunity to take advantage of economies of scale and economy of scope. In discussing the predicted up-tick in M&A activity, ITL’s Stephen Applebaum remarks that a ‘going it alone strategy will be increasingly risky as larger, national players will garner more market share by offering better pricing, superior technology solutions and greater geographic coverage than “mom and pop” operations’. What is true for one part of the property and casualty industry applies to other parts as well. The SCM/Granite transaction involved suppliers of adjusting services, medical assessment and health services, risk mitigation and investigation services, and forensic engineering services.
While the prediction is for further consolidation within the claims supply chain, it is not unreasonable to assume these same forces will drive M&A activity in the brokerage and insurance company sectors.
In the past year, there have been two significant transactions involving Canadian insurers: the purchase of Dominion of Canada by the Travelers, and the purchase of the Canadian operations of State Farm Insurance by Desjardins Group. At the same time, mutual insurance companies have been active on the merger front. On January 1st of this year, the Commonwell Mutual Insurance Group was formed by the amalgamation of Farmers’ Mutual Insurance Company (Lindsay), Glengarry Mutual Insurance Company and Lanark Mutual Insurance Company. Because brokerages deal at the consumer level where the offer of local, personalized service carries weight, some of the forces that drive M&A activity are not as significant.
Nevertheless, transactions involving property and casualty insurance brokerages remain in the news. Three such transactions were announced in the last couple of days. Neziol Insurance Group and Ottawa Valley Insurance are joining Intact’s BrokerLink subsidiary and Marsh Canada announced the acquisition of Montreal-based construction and surety provider Kocisko Insurance Brokers Inc. In announcing the sale, Terry Kocisko, the CEO of the brokerage, echoed some of the forces identified in Stephen Applebaum’s article. Terry Kocisko remarked that the brokerage’s clients ‘will benefit from the tremendous service and broader array of capabilities and resources that Marsh has to offer.’ The life insurance industry also witnessed a significant transaction this week as Manulife Financial Corp. announced its $4-billion acquisition of the Canadian operations of Standard Life PLC. Although we will probably not continue to see the same level of M&A activity as we have seen in the past couple of weeks, the forces that drive these transactions will likely lead to a continuation of the trend to consolidate.
Note: By submitting your comments you acknowledge that insBlogs has the right to reproduce, broadcast and publicize those comments or any part thereof in any manner whatsoever. Please note that due to the volume of e-mails we receive, not all comments will be published and those that are published will not be edited. However, all will be carefully read, considered and appreciated.