Yesterday, we talked about KKR and their survey of insurance company chief investment officers.
We talked about some of the things going on in the industry and some of the investment opportunities, but the overarching theme was “Dream Big,” meaning scaling up the size of an insurance company through merger and acquisition activity.
We’re going to continue to see the insurance market consolidate, and it’s going to get really interesting out there. You have to get bigger to be able to afford all of the new technology and automation services and to attract world-class investment talent to earn the type of returns you need to grow your business.
It’s kind of a grow or go out of business situation, just as small banks have experienced for decades now. You just reach a point where you become too small to survive. Everyone else is bigger, better, faster and is earning higher returns that you thanks to their scale.
Now, the other thing we’re seeing in the insurance industry is that it’s not just insurance companies buying other insurance companies. There are new players in this space, including private equity firms and other asset managers, that are looking at those trillions of dollars being managed by insurance companies.
They’re thinking to themselves that if they can control that, then they can manage all of the money and collect those fees. Apollo, KKR and Blackstone have all been buying up insurance companies over the last couple of years to have that locked-in, captive, long-term, fee-producing capital. So that’s another source of buyers that we’re seeing much more lately.
The big action so far has been in insurance brokers and service providers. According to PWC, we’ve seen 453 transactions over the last year in the insurance industry. 375 of those deals have been mergers and acquisitions of insurance brokers and services companies. So, the action is starting to work its way up the chain.
Now, this may sound boring just like the consolidation in the banking industry, but it could also make you just as much money as buying banks that get taken over, which is to say you could make a lot of money.
I think this strategy could easily outperform the stock market indexes, especially over the next 10 years.
Crawford & Company
So, now let’s get to a stock that I think is perfect for the current environment. It’s trading for the right price, and it’s in the right part of the insurance industry. The company is Crawford & Company (CRD-B). It’s a dual class stock, with the family owning most of the B shares and controlling the voting interest of the company.
This is an insurance technology and service provider that works in claims processing, and they’re building a platform business, which is pretty new and exciting to be able to offer a platform to insurance companies.
But the big thing is the claims processing and the edge that they have over just about everyone else because they’ve been doing it longer than everyone else. They’re starting to automate it and use financial technology to deliver these services to other companies. I think that’s going to be a really strong source of growth for Crawford for a very long time to come.
What Makes This a Great Opportunity
However, it’s worth noting that we’re paying 10 times earnings for this. It has a 2.6% dividend yield, and it’s not trading at a huge premium to book value. This is really a growth company, and it’s growing at a very nice pace and is expecting to accelerate. Analysts are falling all over themselves to raise their estimates right now.
And when you’ve got estimates being raised, and you’re only paying 10 times earnings, you’ve got something pretty good. It’s likely going to do well no matter what the market does.
There are also a lot of fintech companies in the insurance space that would love to offer the services and platforms that Crawford has in-house to a wider range of the insurance industry, so a takeover of this stock is not unimaginable.
However, insiders do absolutely control this company, and it’s not just the A shares. Insiders own about 50% of the A shares, but they own 58% of the B shares as well. So, nobody’s taking this company over without paying a price that makes the Crawford family very happy.
There’s another owner of the A shares that’s worth mentioning, and it’s someone that I’ve followed for a long time. Several of the deals that he entered as an activist have worked out extremely well. David Nierenberg of the D3 Family Funds owns a little over 7% of this company and is engaging with management to discuss ways to improve the business and get the stock price a lot higher.
His presence in the shareholder list, I think, provides an additional level of safety. And I think as a long-term holder, it’s going to be really tough to go wrong and not make money owning shares of Crawford. It’s a growth stock at a bargain multiple.
We’re collecting a solid dividend, and you’ve got an activist that wants to pressure the company to do things that get the stock price higher, including possibly an outright sale of the company. If the company was put on the market, there’s dozens of likely buyers from the financial technology field and other insurance companies.
I think this is extremely attractive, and it’s just one of many potential takeover opportunities in the insurance industry that we’re going to be talking about in the weeks and months ahead.
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