Anatomy of a Deal

Conducting business is always something like a strategic game of chess, but in turbulent times like these, the consequences — good or bad — can be quite a bit heftier. Larry Shumka, president and CEO of SCM Insurance Services Inc. (formerly The Shumka Group), believes his firm’s recent purchase of the loss adjusting and risk management business units from CGI Group Inc. represents more than just a strategic union between claims adjusting, risk management, data collection and access to claims personnel. For him, the timing of the deal was critical, coming as it did just prior to the economic meltdown.

Shumka says it was important to him that he was able to close the deal “for an undisclosed amount” without relying on infusions from the firm’s private equity partner before the credit market in North America dried up. The acquisition of CGI’s risk management services unit prior to the credit squeeze creates an opportunity for SCM to benefit from the current business environment, he says.

“A deal of this magnitude today would be very difficult given the conditions around access to credit,” Shumka says. “Our timing around that was perfect. Sometimes the economy and the state of the financial services world are negative, but we actually found that the transaction and the pieces that came with it put us in a positive position to deal with the current economy.”

In the summer of 2008, CGI Group Inc. announced its plan to divest its Canadian claims adjusting business unit and risk management services for the Canadian property and casualty insurance market. Shumka tendered an offer and successfully acquired the business units from CGI, giving his firm the title of the largest independent insurance services firm in Canada.

The deal closed on Aug. 6, 2008. Since that time, the organization has undertaken a massive re-branding effort to reposition itself in the Canadian marketplace. What was formerly known as The Shumka Group is now SCM Insurance Services. The operating companies under the newly minted parent company are ClaimsPro Inc. (formerly SCM Adjusters Canada Ltd.), FIC (Forensic Investigations Canada Inc.) and RMS (SCM Risk Management Services Inc.)

In effect, the acquisition expanded the service capabilities of SCM Insurance Services. It created a larger geographical footprint for the firm, giving them a much stronger presence in Ontario and Quebec, and it addressed a risk management issue by ensuring the firm has a sufficient number of qualified personnel to fulfill clients’ needs moving forward.

PIECES OF THE PUZZLE

Shumka’s new firm is somewhat of a Leviathan. In a way, the new additions to Shumka’s firm can be traced back to a previous merger between the Underwriters’ Adjustment Bureau (UAB), which did loss adjusting, and the Insurers’ Advisory Organization (IAO), an underwriting services provider. Both the UAB and IAO were industry-owned organizations from the time of their inception — 1951 and 1884, respectively — to the time when CGI purchased them in 2002.

Prior to their purchase by CGI in 2002, UAB was owed by 35 different insurance companies and IAO was owned by 55. Both UAB and IAO had boards of directors comprised of CEOs and senior officers from the insurance companies that owned them. In 1992, the UAB purchased the IAO in a share swap; the two organizations operated under the umbrella of UAB Group Inc. At that time, the group had a combined revenue of more than Cdn$53 million and about 800 employees.

Dermot Murphy, vice president of specialty lines at SCM ClaimsPro, has worked in the insurance industry for more than 40 years. He was a vice president of field operations for the UAB Group at the time of the UAB-IAO merger. Although the two organizations worked under one moniker, they still operated independently, he recalls.

Essentially, the IAO was an underwriting services provider. In other words, it did everything but loss adjustment, covering the gamut from risk assessment, engineering, actuarial services and loss prevention. Merging with the UAB provided the IAO with its missing piece of the puzzle — loss adjustment.

A decade after it formed, the UAB Group was snapped up by CGI for Cdn$53 million. On its face, it was a counter-intuitive acquisition for CGI. Why would a technology powerhouse be interested in purchasing what was essentially a risk management and loss adjusting firm?

“The IAO was the sales arm for CGI automated products that targeted the insurance industry,” Murphy says. “The products that CGI had were essentially automated underwriting tools, if you will… The IAO [offered CGI] better opportunities to open doors because of [the IAO’s] ownership structure: we could get in and see the head underwriter and say, ‘Have we got a new product for you.'”

The fit worked well for a time. But in mid-2008, CGI decided to divest the business units. A lot of speculation remains about CGI’s motives for making the move. Some believe the company was trying to unload business units that, when compared to the high-tech industry, had disappointing rates of return and were operating in a relatively static growth industry.

When CGI put the units on the block, Shumka saw a strategic business opportunity based on the claims data the CGI units had amassed. During the decades they existed, both the IAO and UAB accumulated a vast amount of survey and claims data. Greg McCutcheon, president of RMS, says that during his tenure with GGI, the information was basically converted into the country’s largest database. The claims data related to residential and commercial properties, environmental data, land-use data dating back to the 1800s, flood plains and maps, as well as grades assigned to municipalities based on their ability to fight and control fires.

“We’re doing a lot of GIS and geo-coding of our information,” McCutcheon says. “It’s a complex business unit because it provides so many different services to the industry. While our primary business is gathering field data on [contemporary] commercial and residential inspections, based on the fact that our history dates back to the 1800s, we have more Canadian information than any other company in Canada on properties, geographical systems and the inspection and rate databases.”

LOOKING AHEAD

Shumka refers to his newly acquired risk management business unit as an “uncut diamond” that he hopes to make an even bigger part of the insurance industry in Canada. “Having data available and the technology to disseminate it — given the difficulties around the profitability of insurance, hard markets, capital, insuring- to-value, etc. — [is] really going to become a cornerstone in providing information to the insurers, so that they can make the right decisions around their rating philosophies,” he says.

SCM plans to leverage the data component of the business unit and launch a series of information service lines for domestic insurers in Canada in 2009. The projects on the docket for development, he adds, include the creation of flood maps that would allow insurers to underwrite overland flood, as well as an insurance- to-value tool and a suite of tools focused to the commercial broker market.

As for the adjusting piece of the puzzle, with ClaimsPro “we have the greatest depth as far as numbers of technical adjusters and resources,” Shumka says. “And we have increased the access for our clients to various disciplines in the adjusting field.”

Shumka says his organization has “more capacity, and now that’s critical.” He notes that 2008 has been very difficult for the industry, because there has been an increase in the number and value of claims — particularly in the personal and commercial property lines — and yet there is a “massive shortage” of qualified adjusters in Canada. The latest acquisition addresses this conundrum, Shumka says. “One of our risk concerns is in being able to make trained adjusters available to our clients,” he says. “This acquisition will allow us to do that: through the retention of tho se adjusters, we will be able to serve those clients’ needs without a concern about capacity.”

Now that the “heavy lifting” of the merger is virtually complete, Shumka has his eye on the future. He sees immense growth opportunities in all three of SCM’s business units moving forward, both organically and through acquisitions. “Acquisitions in the risk management and investigation field is an area that we’re going to be focused on in 2009 and onward,” he says.