! August 2017 Copyright 2017 StoneRidge Advisors, LLC Loss Adjusting and M&A Trends We are pleased to present StoneRidge Advisors latest views on the U.S. loss adjusting industry, with a focus on recent M&A trends. In this report we will address the following topics: (i) revenue growth trends, (ii) recent volume of M&A transactions in the loss adjusting sector, (iii) diversification trends of the leading loss adjusting companies, (iv) current active buyer universe, (v) valuation drivers, (vi) recent valuation trends, and (vii) M&A outlook. Revenue Growth By Segment in the Loss Adjusting Market There is limited revenue growth data available for the overall loss adjusting indutry, therefore we have used publicly-traded Crawford & Company as a proxy for the industry. Crawford is a large, diversified player in the U.S. loss adjusting market with operations in several distinct segments which are illustrative of overall industry trends. Crawford divides its U.S. services business into four segments: (i) Claims Field Operations, (ii) Technical Services, (iii) Catastrophe Services and (iv) Contractor Connection. These four divisions represent distinct segments of the loss adjusting and services market, which have experienced very different growth trends. Crawford Segment Analysis ($ in millions) $250 $200 $150 $100 $217 $12 $23 $28 $207 $16 $22 $29 $206 $190 $23 $20 $15 $38 $30 $32 $215 $201 $204 $27 $36 $51 $39 $36 $44 $29 $28 $25 $242 $231 $59 $71 $69 $51 $29 $29 $50 $154 $140 $124 $113 $106 $104 $96 $85 $81 $0 2008 2009 2010 2011 2012 2013 2014 2015 2016 U.S. Claims Field Operations U.S. Catastrophe Catastophe Services Source: 2016 Crawford & Company 10-K U.S. Technical Services U.S. Contractor Connection
! View from the Ridge August 2017 Crawford 2008 vs. 2016 Revenue By Division ($ in millions) Source: 2016 Crawford & Company 10-K Crawford s Claims Field Operations division, which services the traditional daily commercial and personal lines segments of the market, has been steadily shrinking and is currently almost half the size that it was in 2008. This decline is largely a result of insurance carriers increasingly utilizing direct repair networks and technology to desk adjust certain claims instead of using field adjusters, as well as downward pressure on fee schedules over the last decade. This trend has most impacted small mom and pop and regional adjusting firms who are largely dependent upon this business. Crawford has largely been able to offset this decline through growth in its Contractor Connection segment. Crawford Claims Field Revenue vs. Contractor Connection Revenue ($ in millions) $180 $160 $140 $120 $100 $80 $154 $140 $124 $113 $106 $104 $96 $85 $81 $60 $40 $20 $0 $71 $59 $51 $36 $27 $20 $23 $12 $16 2008 2009 2010 2011 2012 2013 2014 2015 2016 U.S. Claims Field Operations Source: 2016 Crawford & Company 10-K U.S. Contractor Connection 2
View from the Ridge August 2017 Revenue for Crawford s Technical Services division, which is focused on adjusting larger and/or more complex commercial losses, has been flat for the last several years. The commercial loss adjusting market has been very stable as both supply (availability of highly skilled commercial loss adjusters known as executive general adjusters) and demand from insurance carriers have been steady. The commercial loss adjusting market tends to be less volatile than other segments of the market and able to drive attractive margins based upon the high hourly rates charged (often in excess of $200 per hour) based upon the technical skills required. The challenge for this segment remains finding or training qualified adjusters as the general loss adjuster population continues to age. Additionally, the growth of this market segment is growth reliant upon increased outsourcing from insurance carriers. To the extent that Bermuda players and other newer entrants can grow faster than the overall insurance market, this segment will benefit as those companies almost entirely outsource complex commercial adjusting to third parties as opposed to utilizing staff adjusters. The commercial segment is also particularly insulated from potential disruptions from new technology since it relies on the expertise of the adjusters which is difficult to supplant with new tools, technologies, or alternative claims service delivery methods (e.g. managed contractor repair networks). Revenue from Crawford s Catastrophe Services division has grown significantly from 2008-2016. A meaningful portion of the recent growth is attributed to a single outsourcing project for a major insurance carrier, which has contributed more than 50% of the revenue for this segment since 2015. Similarly, we have seen positive trends for other loss adjusting companies related to catastrophe and outsourced staffing. The major U.S. insurance carriers are typically not interested in adding to their claims staff and have been seeking to outsource both the field adjusting and desk adjusting portions of their volume-driven claims business. The outsourced staffing projects and desk adjusting work provides increased opportunities of significant size on the auto side of the business which typically do not exist for field adjusting. Crawford s final segment of their U.S. Services business is Contractor Connection, which is a managed repair contractor network. This has been the highest growth segment for Crawford, increasing by 499% since 2008. Crawford originally entered the contractor business through the acquisition of PRISM Network in August 1999 for approximately $10 million. If recent growth trends continue, revenue from Contractor Connection could surpass the revenue from Crawford s Claims Field Services division in 2017. We believe that the amount of revenue that will flow directly into contractor networks and away from the traditional field adjusting channel will continue to grow. Several other industry players have increased their focus on this segment of the market either through acquisitions, such as First Choice Repair and Diamond Property Loss Services by VeriClaim and Worley Claims Services acquisition of Nexxus Solutions Group, or through organic growth such as Cunningham Lindsey s introduction of Oriel Services in the U.S. market in 2016. 3
! View from the Ridge August 2017 Declining M&A Volume in Loss Adjusting Services As shown in the following chart, loss adjusting M&A activity declined in 2016 and year-todate in 2017 compared to more active periods in 2014 and 2015. Loss Adjusting M&A Transactions 12 1 10 1 9 11 6 11 5 5 1 9 9 5 5 4 5 5 2011 2012 2013 2014 2015 2016 YTD 2017 Loss Adjusting Companies Related Services Companies Source: StoneRidge Advisors database Note: StoneRidge Advisors acted as a finacial advisor on 25% of these transactions There are several drivers of the recent decline in the number of transactions. First, some of the historically active buyers were focused on integrating previous acquisitions in 2016. Additionally, some buyers are currently facing fairly heavy debt loads which might be limiting their financial flexibility. Another key trend, which we discuss in more detail below, is that larger loss adjusting companies have become increasingly focused on diversifying their services offering rather than buying additional loss adjusting-focused companies. Diversification Trends of Loss Adjusting Companies The leading loss adjusting companies continue to diversify into other lines of claims services to support their growth and increase their share of wallet of their customers. The primary drivers of this strategy are: (i) anticipation of industry trends and a focus on higher growth and margin areas within the market, (ii) introduction of additional products to existing customers, and (iii) reduction of revenue and earnings volatility. Several recent examples of this include: Crawford & Company s acquisition of WeGoLook to introduce a new channel; Worley Claims Services acquisition of Nexxus Solutions Group to expand into the managed repair network market; BrightClaim s acquisition of National Vendor to expand its presence in the contents space; VeriClaim s acquisitions of Diamond Property Loss Solutions and First Choice Repair to expand into the managed repair network market; and Engle Martin s acquisition of Guardian Digital Forensics to expand its forensic engineering business. As shown in the chart above, there were more acquisitions of claims services related businesses by loss adjusting companies in 2016 than in the previous five years combined. 4
! View from the Ridge August 2017 Current Active Buyer Universe The most active buyers of loss adjusting companies continue to be well-capitalized strategic buyers who are backed by private equity firms. Worley (backed by Aquiline Capital Partners) and VeriClaim (backed by KKR) have been the two most active acquirers and have accounted for approximately 40% of the M&A transactions in the claims services sector since 2011. Number of Claims Services Transactions Since 2011 12 11 13 6 4 4 4 3 Source: StoneRidge Advisors database Note: StoneRidge Advisors acted as a finacial advisor on 25% of these transactions Some newer entrants into the U.S. market include: SCM through its acquisition of Nixon and Company and Genpact with its acquisition of BrightClaim. Additionally, McLarens completed its first acquisition in the U.S. market in several years with its recent purchase of New York-based Independent Adjustment Company. We would expect these buyers, along with the historically active parties listed above to remain the leaders in the M&A market. Valuation Drivers The most important drivers of valuation are (i) the size of a company and (ii) the company s historical and projected growth. We have divided the valuation drivers into three segments: (i) Quantitative Fundamental Drivers, (ii) Qualitative Fundamental Drivers, and (iii) Premium Valuation Drivers. 5
View from the Ridge August 2017 Loss Adjusting Building Blocks of Value High Differentiated Service Offerings Scalable Operations Management Strength Technology Superior Customer Service Premium Valuation Drivers Valuation Multiple Growth Solid EBITDA Margin Client Concentration Volatility / Weather Dependence Quality of Client Relationships Diverse Client Base Minimal Addbacks and Consistency Historical and Potential Future Growth Longevity and Stability Diversity of Business Qualitative Fundamental Drivers Quantitative Fundamental Drivers Size Larger Revenue Size Directly Results in Greater Value Low Characteristics The more of the positive attributes that a company can demonstrate on this chart, the greater the likelihood of a premium valuation in an M&A transaction. Recent Valuation Trends The valuation of loss adjusting companies continues to be driven by multiples of EBITDA. As mentioned above, the largest drivers of valuation tend to be the size of the company and its growth potential. We have included below a range of EBITDA multiples we typically see based upon the size of a loss adjusting company. Typical Loss Adjusting M&A Valuation Ranges Revenue $100mm+ $50 - $100mm $25 - $50mm $10 - $25mm $5 - $10mm < $5mm 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x 11.0x EBITDA Multiple 6
View from the Ridge August 2017 Overall, we have seen the valuations for loss adjusting companies trending up slightly over the last several years as financing for loss adjusting companies specifically and insurance services business in general continues to become more readily available. Banks and other financing providers have grown increasingly comfortable with the fundamentals of the loss adjusting industry and that the majority of competitors have stable business models that are not stricty reliant upon hurricanes. We have seen a greater discrepancy in values based upon the perceived quality of the target. There recently has been a greater distinction between the higher quality companies that have some unique attributes that can drive enhanced revenue growth and margin for a buyer. Current M&A Outlook We expect the M&A market to remain relatively stable for the remainder of 2017 and 2018. There continues to be interest from buyers to grow through acquisition, but the number of potential sellers, however, has declined from previous years as many of the more attractive targets have already sold during the recent, fairly robust M&A market. We think that regional and local players will continue to see the benefits of selling and joining larger national companies that have greater resources and can expand their potential client relationships. It has become increasingly challenging for regional and local loss adjusting players to service national carriers who have continued to shrink their vendor lists while at the same time increasing their technology and service requirements. 7
View from the Ridge August 2017 StoneRidge Advisors has completed the following loss adjusting transactions in 2017: Worley Claims Services Acquisition of Apex Adjusters Worley Claims Services announced the acquisition of Apex Adjusters on June 7, 2017. The acquisition of Apex continues Worley s strategy of finding leading regional players to expand their client base and geographic capabilities. The transaction provides Apex with access to the resources and client base of a larger player in the industry. StoneRidge Advisors acted as exclusive financial advisor to Worley Claims Services on this transaction. SCM s Acquisition of Nixon and Company SCM announced the acquisition of Nixon and Company, Inc. on May 3, 2017. The acquisition of Nixon and Company represents SCM s initial entry into the U.S. market. Nixon provides a new platform from which SCM will continue to build out its service offerings both domestically and into the Lloyd s of London marketplace. The transaction provided Nixon s senior management team and employees the opportunity to be part of a larger organization with greater resources and capabilities which should enhance their growth opportunities. StoneRidge Advisors acted as exclusive financial advisor to SCM on this transaction. Administrative Strategies Recapitalization by Quiet C Holdings Administrative Strategies has sold a 50% ownership interest through a recapitalization sponsored by Quiet C Holdings. The recapitalization provided liquidity to the owners of the Company and a financial partner with capital to support the Company s growth objectives. The investment marks Quiet C s first investment in the claims services sector and establishes a platform for future growth. By pairing with a leading flood adjusting management team, Quiet C is able to leverage management s industry expertise and Quiet C s business acumen and financial resources to capitalize on opportunities in the market. StoneRidge Advisors acted as exclusive financial advisor to Administrative Strategies on this transaction. Contacts Chicago 120 South LaSalle Street Suite 1300 Chicago, IL 60603 Jay Poorman 312-854-2911 jpoorman@stoneridgeadvisors.com Rocky Golem 312-854-2912 rgolem@stoneridgeadvisors.com Peter North 312-854-2914 pnorth@stoneridgeadvisors.com Patrick O Hara 312-854-2913 pohara@stoneridgeadvisors.com Tim Stan 312-854-2907 tstan@stoneridgeadvisors.com New York 1120 Avenue of the Americas Suite 4003 New York, NY 10036 Doug Tegen 212-626-6796 dtegen@stoneridgeadvisors.com Has acquired Has acquired Has completed a recapitalization sponsored by David Gaebler 212-626-6791 dgaebler@stoneridgeadvisors.com www.stoneridgeadvisors.com StoneRidge acted as financial advisor to SCM StoneRidge acted as financial advisor to Administrative Strategies, LLC View from the Ridge does not constitute a recommendation, offer or solicitation to purchase or sell any security. The information contained in the article was based on publicly available information or other sources believed to be reliable, but neither StoneRidge nor SRA represent that it is accurate or complete and therefore it should not be relied on as such. StoneRidge does not accept any liability for the use of information or the views contained in the View from the Ridge. At any time in the past or fueture, StoneRidge Advisors and affiliates may advise or represent companies mentioned in the View from the Ridge. Investment banking services provided through SRA Securities, LLC, a member of FINRA and SIPC. 8