Mergers and acquisitions in legal markets show no sign of abating. But what is behind the desire to consolidate law firms, and what does it mean for the insurance industry?
The August announcement of a merger between Scottish law firm Simpson & Marwick and global practice Kennedys was the latest step in a stream of prolonged consolidation in insurers’ legal markets.
The combined firm, which will continue to trade under the Kennedys name, will share 220 partners and 1500 total worldwide staff, with combined projected turnover exceeding £160m.
Kennedys chief executive Guy Stobart says the deal opens up new territory for the firm, and confirms that this was a key factor behind the deal. “As far as we are concerned, if you look at a map of the UK, there’s a big land mass north of Hadrian’s Wall that we didn’t cover directly,” he says. “There’s also a large number of our competitors saying to mutual clients that they can provide a one-stop shop for the UK.
“In terms of competing pictures, Scotland was a missing piece for us. We are also now the only firm that provides services to insurers north and south of the border in Ireland, in addition to the mainland. That is hugely compelling as far as we are concerned.”
The deal follows another two high-profile mergers between insurance law firms in 2013, between DWF and Fishburns, and Plexus Law and Greenwood.
David Pollitt, head of financial institutions at DAC Beachcroft – itself the child of a 2011 merger – describes the trend as being propelled by twin drivers. “Some firms have external backing and funding. Therefore, they have a bit of cash and they’re in acquisitive mode. Those firms are trying to broaden their insurance offering.
“The second factor is that insurers are telling firms: ‘You can’t just do a small amount of claims work, you’ve got to be able to service us across volume and value – the whole range – and internationally.’ For a lot of firms, that’s a
Pollitt adds: “Those two may or may not connect, but when they do it’s dynamite.”
Stobart says such thinking was likely front of mind for Simpson & Marwick as it approached merger talks with Kennedys. The former, he believes, was hindered by its Scottish focus – despite what Stobart describes as an “excellent” practice when it came to panel reviews. He says: “For [Simpson & Marwick], it’s partly defensive, in the sense that we give it access to an international network and a much richer and bigger back-office function.”
Professional indemnity woes
The near future may also see new momentum gaining in the merger space, generated by reports that solicitors have been increasingly struggling to obtain their own insurance.
Professional indemnity cover is mandated by the Solicitors Regulation Authority, but at least 175 law firms were unable to obtain solicitors’ PI cover by the most recent common renewal date on 1 October. They will enter an extended indemnity period, and now have 30 days to source new cover before they will be forced to begin running their businesses down.
At least two of the 100 largest law firms have also been reportedly unable to arrange cover. David Coupe, owner of EC3 Legal, warns: “If they don’t get PI sorted by November then they will have to go out of business, and that sort of thing is going to get some more mergers going.”
All of this adds up to what Stobart describes as the biggest period of change for lawyers since he began practising in the late 1970s. “This is an extraordinarily turbulent time, and people tend to feel rather exposed,” he says. “There is a whole series of ingredients behind why law firms will look to merge with each other, not least the ‘port in a storm’ mentality.”
Stobart’s comments reflect the fact that the environment in which law firms operate has been ceaselessly busy. At the time of writing, 196 law firms have been approved for an Alternative Business Solution Licence since the SRA began accepting applications onto the programme in 2012. The licences allow non-lawyers to invest in and own legal businesses.
Stobart says a small handful of law firms have taken the opportunity to secure external funding and fuel a shopping spree. “ABS or akin to ABS organisations are the most determined and most focused,” he says. “We’re really seeing a difference in the merger space because they are spending that money on acquiring firms.
“Maybe it’s a bit early to see how that money is being spent, but by 2014 we will see that spending start to emerge much more significantly.”
Filling the war chests
However, Parabis Group CEO Tim Oliver notes insurance law firms may be at a disadvantage if they seek investment to fill war chests from outside their industry, because doubts over the future of the trade are rife. Parabis itself is in the middle of an ABS-approval process that will see it tied with Direct Line Group.
“There hasn’t been a rush of external investment into law firms,” says Oliver. “The uncertainty over the general landscape in the insurance sector hasn’t helped and, in particular, [nor has] the small claims limit.
“Investors don’t want that uncertainty. They’re quite happy to live with efficiency issues, but not uncertainty. I had expected to see some other commercial organisations come in and really drive change alongside the external money, but it has been very slow.”
Pollitt, meanwhile, says that while DAC Beachcroft presently has no interest in applying for the scheme, “the jury is out” on the wider use of an ABS. “We have no ABS plans, but we’re conscious of there being a lot of interest,” he says. “We’re obviously aware of a certain number of law or insurance firms having become ABSs, principally around the claimant side, but also around enabling insurers to tweak their business models so they can continue to work the claimant market.”
The trouble with inking such an agreement with any backer, Pollitt notes, is that the law firm may have to sacrifice a certain amount of independence. This may lead to growth and acquisitions, he argues, but sometimes at a cost. “You may be run by a private-equity backer that will probably have different interests to you,” Pollitt says. “And those finance backers, who, let’s face it, are investing a lot of money, will want growth and profit, and exit in three to five years.
“That sits awkwardly with us, as we want to put our clients first. I’m pretty sure we’re going to see some fallout in the coming years from clients wondering if they’re getting the service they deserve.”
Service is the product
Service seems to be the watchword among the law firms contacted by Post. All are keen to stress that, regardless of any acquisitive activity, the service is the product, and should either be unaffected or enhanced by any transaction.
Oliver is typical in his remarks: “Mergers are, in part, about driving efficiency savings within organisations, which can then be passed on to the client. Certainly the insurance industry is looking for ever more effective pre-litigation and litigation services, and that’s why you have to have an organisation that can respond to that on a very regular basis.”
Oliver adds that he has not seen rates from solicitors increase – but Coupe suggests otherwise. Formerly of Clyde & Co, Coupe launched EC3 Legal one year after his previous employer completed the Barlow Lyde & Gilbert acquisition in 2011. The biggest law firms, he argues, have long hiked rates to more than £500 an hour – even for trivial work.
“The market has been soft since 2005,” he says. “Brokers and managing general agents have struggled on commission rates, and insurers have started putting profit commissions on MGA business. People just could not afford that sort of rate.”
However, this allows smaller law firms to carve out a niche for themselves. In fact, Coupe says that since launching EC3, he has gained work from former clients to which he would not have had access at a larger firm. “One person said to me that they could not have given me work while I was at a bigger firm, because it would have been too expensive,” he says. “Price is important to these guys.”
Coupe adds there are other advantages to be gained for small law firms that decide to work with insurers – even when that client has multinational operations. “This is symptomatic of all law firms, not just insurance‑focused ones,” he says. “But when you take on overseas offices abroad, you don’t always get the best lawyers.
“If you go to Chile, for example, there are two or three really good corporate lawyers and insurance lawyers. But if the client is tied into a big organisation with an office in Chile, they would have to use their lawyer’s local people. They’re not always the best people.”
Rob Williams, head of solving disputes at Weightmanns, shares this scepticism: “It is survival of the fittest, but I’m not sure that by being bigger, you become fitter. It depends on lots of other factors.
“Being small and boutique doesn’t help either; it’s just about being a quality firm that provides what we would want as a client, which is an authentic experience.”
Stobart, who freely admits Kennedys’ deal with Simpson & Marwick was driven by a desire to provide greater reach to insurer clients, contests this stance. He says: “Insurers themselves are becoming increasingly global, so there is a real need to provide services across the piece – not just in terms of line specialism, but also by being in the same places as our clients.
“We have to continue to make sure we are able to serve them in the places that they’re growing into as well.”
Indeed, Williams concedes that concerns over achieving a global reach are only applicable when a minimum scale has been attained. “You need to be of a certain size as an organisation to meet the criteria and get a seat at the table before you even play the game,” he says.
Oliver agrees, and says that serving at least UK and Ireland is now an essential requirement for law firms seeking to work with most of the UK’s insurers, while some also mandate a continental European operation.
He adds that as insurers continually review their panels, they will seek to cut the numbers of law firms they are prepared to work with. “They don’t want to be getting all these specialist areas from 20 different practices. They want half a dozen good firms that can do everything,” he says, speculating that some insurers may even look to work with as few as two firms.
Oliver adds that, as a result, the market for specialist law firms may only continue to consolidate. “There will only be six insurance law firms left standing,” he says. “We’re heading in that direction.”
However, Stobart notes it is unlikely such a process will concern insurers, adding anxiety over a lack of variety is a distant prospect. “It is most unlikely it will ever get to that extreme,” he says.
In the meantime, firms that have already positioned themselves through mergers may seek to expand through more subtle methods of acquisition. For example, Pollitt says DAC Beachcroft is receiving more phone calls from clients who are recommending solicitors and teams at other firms.
“That can work really well because you’ve got a great reference and hopefully a great book of business, so the transition becomes easier and client-supported,” he says. “We’re not getting calls every day of the week, but it’s certainly something I’m seeing more of than last year and the year before.”
- Top 100 Insurtech: Quarter four update
- Charles Taylor bolsters liability team by hiring senior sextet from Vericlaim
- Gallagher Bassett acquires claims management firm
- Roundtable: Is a single customer view taking off in insurance?
- Finch and ICB owner on acquisition trail with sight set on €500m revenue by 2022
- Insurtech diary: Getting stuck into insurance
- Analysis: The mystery of the missing Insurance Fraud Taskforce report