CELEX: 32018M9127
Language: en
Date: 2018-12-20 00:00:00
Title: Commission Decision of 20/12/2018 declaring a concentration to be compatible with the common market (Case No COMP/M.9127 - Carlyle Partners VII Cayman, L.P. / Sedgwick, Inc.) according to Council Regulation (EC) No 139/2004 (Only the English text is authentic)

EUROPEAN COMMISSION
                                                               Brussels, 20.12.2018
  In the published version of this decision, some              C(2018) 9200 final
  information has been omitted pursuant to Article
  17(2) of Council Regulation (EC) No 139/2004
  concerning non-disclosure of business secrets and                     PUBLIC VERSION
  other confidential information. The omissions are
  shown thus […]. Where possible the information
  omitted has been replaced by ranges of figures or a
  general description.                                         To the notifying party:
Subject:            Case M.9127 – Carlyle / Sedgwick
                    Commission decision pursuant to Article 6(1)(b) of Council
                    Regulation No 139/20041 and Article 57 of the Agreement on the
                    European Economic Area2
Dear Sir or Madam,
(1)         On 16 November 2018, the European Commission received notification of a
            proposed concentration pursuant to Article 4 of the Merger Regulation by which
            funds managed by affiliates of The Carlyle Group L.P. (“Carlyle”) acquires
            within the meaning of Article 3(1)(b) of the Merger Regulation sole control of
            the whole of Sedgwick, Inc. (“Sedgwick”) by way of purchase of shares (“the
            Transaction”). Carlyle is referred hereinafter as the "Notifying Party" and,
            together with Sedgwick, the "Parties".
1.        THE PARTIES
(2)       Carlyle is a global alternative asset manager, managing funds that invest globally.
          Carlyle's portfolio of companies includes in particular The Innovation Group Ltd
          (“Innovation Group”), a company active in third party administration ("TPA")
          insurance claims management and loss adjusting services.
(3)       Sedgwick is a global provider of risk management solutions focusing primarily on
          providing insurance-related services to insurers, self-insured corporations,
          governmental authorities, etc. Sedgwick provides inter alia loss adjusting, TPA
1    OJ L 24, 29.1.2004, p. 1 (the 'Merger Regulation'). With effect from 1 December 2009, the Treaty on
     the Functioning of the European Union ('TFEU') has introduced certain changes, such as the
     replacement of 'Community' by 'Union' and 'common market' by 'internal market'. The terminology of
     the TFEU will be used throughout this decision.
2    OJ L 1, 3.1.1994, p. 3 (the 'EEA Agreement').
Commission européenne, DG COMP MERGER REGISTRY, 1049 Bruxelles, BELGIQUE
Europese Commissie, DG COMP MERGER REGISTRY, 1049 Brussel, BELGIË
Tel: +32 229-91111. Fax: +32 229-64301. E-mail: COMP-MERGER-REGISTRY@ec.europa.eu.
 ---pagebreak---         insurance claims management, loss consultancy and property reinstatement
        services.3
2.      THE OPERATION
(4)     The notified concentration consists of the acquisition of indirect sole control by
        Carlyle over Sedgwick. Carlyle Partners VII Cayman L.P. and Carlyle Global
        Financial Services partners III L.P., funds managed by affiliates of Carlyle will
        indirectly hold an approximately […] and […] interest in Sedgwick. The
        remaining minority shares will be split between Caisse de dépôt et placement du
        Quebec ("CDPQ") and Stone Point Capital LLC., an investment fund, which will
        not hold, either individually or collectively, any veto right on strategic decisions.
(5)     Therefore, the Transaction qualifies as a concentration within the meaning of
        Article 3(1)(b) of the Merger Regulation.
3.      EU DIMENSION
(6)     The undertakings concerned have a combined aggregate worldwide turnover of
        more than EUR 5 000 million4 (Carlyle: EUR […] million; Sedgwick EUR […]
        million). Each of them has an EU-wide turnover in excess of EUR 250 million
        (Carlyle EUR […] million; Sedgwick: […] million), but they do not achieve more
        than two-thirds of their aggregate EU-wide turnover within one and the same
        Member State.
(7)     The Transaction therefore has a Union dimension pursuant to Article 1(3) of the
        Merger Regulation.
4.      RELEVANT MARKETS
(8)     The Transaction gives rise to horizontal overlaps between Sedgwick and
        Innovation Group (a Carlyle portfolio company) regarding the provision of loss
        adjusting (“LA”) services in the United Kingdom and Germany.5 While Sedgwick
        provides LA services for a wide variety of risks, Innovation Group’s operations
        essentially focus on the subsidence risk,6 which accounts for more than [80-
        100%] of its LA business.
(9)     The Transaction also leads to a potential vertical link in Ireland and in the UK
        between the upstream provision of TPA and LA services by Sedgwick and the
3   Sedgwick recently acquired sole control over Cunningham Lindsay (see case M.8764 – Sedgwick/
    Cunningham Lindsay).
4   Turnover calculated in accordance with Article 5 of the Merger Regulation.
5   The Transaction also gives rise to limited overlaps with respect to the provision of (i) third party
    administration ("TPA") claims management services in the UK and (ii) business process management
    and business process outsourcing in Ireland. These overlaps do not give rise to affected markets under
    any plausible market definitions and therefore will not be further discussed in this decision.
6   Subsidence occurs when shifts in the ground cause movements in a building’s foundations, causing
    damage to the building.
                                                         2
 ---pagebreak---          downstream insurance brokerage activities of PIB Ltd ("PIB", another portfolio
         company of Carlyle).7
4.1.     Product market definition
         4.1.1.        Loss adjusting ("LA")
(10)     LA services involve the provision of inspection services related to claims
         processing, which typically consists of sending an inspector to the site of the loss
         to assess whether the insurer is obligated to pay the insured (or to pay a third
         party on behalf of the insured), to quantify the insurer’s exposure, and to
         determine whether the insurer can recover payment from a third party. Most field
         inspections are performed by third party loss adjusters (such as Sedgwick and
         Innovation Group), but may be performed by an insurer or self-insured
         corporation using in-house claims inspectors. Claims that require field inspection
         range from small scale commercial or homeowner claims to large and complex
         industrial losses stemming from catastrophes and natural disasters.
(11)     In previous cases,8 the Commission considered that LA services may belong to a
         separate product market from other insurance-related services. In
         Sedgwick/Cunningham Lindsey,9 the Commission also envisaged to further
         segment LA services (i) depending on the type of claims, distinguishing
         property10 and casualty11 LA services and, within property, between commercial
         and personal property LA, and (ii) distinguishing between in-house and external
         LA services. Conversely, the Commission did not consider a sub-segmentation of
         LA services by type of risks and, thus, did not assess whether the subsidence risk
         forms a distinct market segment within property LA (or within personal and
         commercial property LA). The exact scope of the product market definition was
         ultimately left open.
(12)     The Notifying Party agrees with the previous assessment of the Commission and
         submits that the exact product market definition for LA services can be left open
         since the Transaction does not raise serious doubts under any plausible product
         market definitions envisaged in the Commission's past decisional practice.
(13)     The Notifying Party also submits that subsidence LA is an integral part of
         property LA and does not constitute a distinct product market. It is argued that a
         sub-segmentation of property LA by type of risks (such as subsidence) is not
         reflective of market reality notably on the grounds that (i) the major players
7   There are also potential supply relationships in the UK between (i) the provision of TPA claim
    management services by Sedgwick and (ii) the activities of two other Carlyle portfolio companies,
    namely NARS (a provider of car repair and maintenance services) and Bardon (an insurance
    distributor). These potential vertical links do not give rise to affected markets, under any plausible
    market definitions, and therefore will not be further assessed in this decision.
8   See M.6752 – CVC/Cunningham Lindsey Group and M.8764 - Sedgwick/Cunningham Lindsey.
9   See M.8764 - Sedgwick/Cunningham Lindsey.
10 Property LA services relate to property insurance, which is a policy that provides financial
    reimbursement to the owner or renter of a structure and its content, in the event of damage or theft.
    Property insurance can be written for both personal property (e.g. homeowners and renters) and
    commercial property (e.g. factories). The property segment comprises a range of different types of
    risks, such as fire, theft, accidental damage, subsidence, and escape of water.
11 Casualty LA services related to casualty insurance, which is mainly liability coverage of an individual
    or organisation for negligent acts or omissions property and casualty.
                                                           3
 ---pagebreak---        provide an integrated offer of services across different types of risks and (ii) the
       claims management process is largely the same across the spectrum of risks
       (requiring the same assets, skills and processes regardless of the risk). The
       Notifying Party acknowledges that, for certain risks, there may be a certain degree
       of expert specialisation to assess the damage but claims that experts can easily be
       cross-trained or re-trained for distinct risks depending on the LA needs.
(14)   The results of the market investigation where not conclusive as to whether
       subsidence LA services constitute a distinct product market. For instance, several
       competitors consider subsidence as an integral part of property LA but the
       remaining respondents took the opposite view indicating that subsidence is a
       separate business line due notably to the need for experts (such as Chartered
       Surveyors or engineers).12 Although most competitors consider that subsidence is
       not a distinguishing feature when competing for LA contracts 13 and most
       customers source subsidence and property LA services from the same supplier,14
       the market investigation revealed the existence of specific tenders and panels15 for
       subsidence LA16, as well as the existence of LA providers specialised in
       subsidence (such as Maule and Innovation Group).
(15)   As regards the distinction between personal and commercial subsidence LA
       services, market participants indicated that this segmentation is not relevant and
       that the requirements to be active in subsidence LA are the same for both
       commercial and personal subsidence LA17. For instance, one respondent indicated
       that "The technical aspects of subsidence are the same in both personal and
       commercial", although he recognised that "commercial is more complex".
(16)   For the purpose of this decision, and based on the above, the Commission
       considers the provision of subsidence LA services should not be segmented
       further between commercial and personal property subsidence. The Commission
       also concludes that the precise product market definition for property LA services
       can be left open as to: (i) whether a distinction should be made between personal
       and commercial property LA; (ii) whether subsidence LA is a part of LA services
       or a separate sub-segment; and (iii) whether the relevant market should comprise
       also in-house LA services. This is because the Transaction does not raise serious
       doubts as to its compatibility with the internal market regardless of the exact
       product market definition.
       4.1.2.       Third Party Administration ("TPA") claims management
(17)   Claim management services involve the administration of insurance claims. TPA
       claims management service providers replicate all or part of an insurer's internal
       claims management process, including first notification of loss, initial analysis of
12 See replies to question 6 of questionnaire Q2 to competitors.
13 See replies to question 9 of questionnaire Q2 to competitors.
14 See notably replies to question Q8 of questionnaire Q1 to customers.
15 A panels is a business arrangement whereby a customer, generally an insurer, enters into contracts
   with a fixed number of suppliers to perform certain LA work that it has decided to outsource to third
   party service providers (see M.8764 – Sedgwick/Cunningham Lindsey, para. 30).
16 See replies to question 22 of questionnaire Q2 to competitors and replies to question 13 of
   questionnaire Q1 to customers.
17 See replies to question 7 of questionnaire Q2 to competitors.
                                                       4
 ---pagebreak---         claim and distribution to appropriate personnel for processing, negotiation and
        settlement, payment, providing management information and data, and recovery.
(18)    In previous cases,18 the Commission found that TPA claim management services
        belong to a separate product market. The Commission also envisaged to further
        segment this market (i) depending on the type of claims, distinguishing property,
        casualty and motor claims management services, and within property, between
        commercial and personal property claims management, and (ii) distinguishing
        between in-house and external claims management The Commission ultimately
        left the exact product market definition open.
(19)    The Notifying Party agrees with the previous assessment of the Commission.
(20)    For the purpose of this Decision, the Commission considers that the exact
        delineation of the market for the provision of TPA claims management services
        can be left open along the lines described above since no serious doubts as to the
        compatibility of the Transaction with the internal market arise under any plausible
        product market definition.
        4.1.3.     Insurance distribution
(21)    In previous cases,19 the Commission considered the existence of a downstream
        market for insurance distribution. The Commission analysed whether the market
        for insurance distribution comprises only outward distribution channels or
        whether it should also be considered to include the sales force and office
        networks of the insurer (i.e. direct sales). This question was ultimately left open.
        The Commission also considered whether a distinction could be made between
        the market for the distribution of life and non-life insurance products, but
        ultimately left the market definition open in this respect.
(22)    The Notifying Party does not propose an alternative product market definition.
(23)    For the purpose of this Decision, the exact product market definition for insurance
        distribution can be left open along the lines described above as the Transaction
        does not raise serious doubts as to its compatibility with the internal market under
        any plausible market definition.
4.2.    Geographic market definition
        4.2.1.     LA and TPA claims management
(24)    In terms of geographic scope, in previous cases the Commission found that the
        markets for LA services and TPA claim management services (and their potential
        sub-segments) could be national or possibly limited to the UK/Ireland cluster.20
        The Commission ultimately left the exact geographic scope of the market open,
        and in particular whether (i) the UK and Ireland should be considered together or
        separately and (ii) whether Northern Ireland should belong to the same
        geographic market as the UK or as Ireland.
18  See M.6752 – CVC/Cunningham Lindsey and M.8764 – Sedgwick/Cunningham Lindsey.
19  See M.8617 – Allianz/LV General Insurance Businesses, M.6957 – IF P&C/Topdanmark and M.6053
    – CVC/Apollo/Brit Insurance.
20 See M.6752 – CVC/Cunningham Lindsey Group and M.8764 – Sedgwick/Cunningham Lindsey.
                                                    5
 ---pagebreak--- (25)   The Notifying Party submits that, although there are no material legal or
       regulatory barriers to cross-border activity, national legal requirements (e.g.
       expert accreditation/qualification) and knowledge of local insurance law are key
       requirements. The Notifying Party also considers that providers of LA and TPA
       services typically need to have employees at national level who can liaise locally
       with customer and undertake site visits when field inspections are necessary. In
       any event, the Notifying Party submits that the geographic scope of the market
       can be left open.
(26)   For the purpose of this Decision, the Commission considers that the exact
       geographic scope of the markets for LA and TPA claim management services
       (and their potential sub-segments) can be left open along the lines described
       above since no serious doubts as to the compatibility of the Transaction with the
       internal market arise under any plausible geographic market definition.
       4.2.2.      Insurance distribution
(27)   The Commission has previously recognised the national nature of insurance
       distribution channels. 21 It however ultimately left the exact definition open with
       respect to the question in particular as to whether the relevant geographic market
       could be wider than national.
(28)   The Notifying Party does not propose any alternative geographic market
       definition.
(29)   For the purpose of this Decision, the exact geographic market definition (national
       or wider) for insurance distribution can be left open along the lines described
       above as the Transaction does not raise serious doubts under any alternative
       market definition.
5.     COMPETITIVE ASSESSMENT
     5.1.  Horizontal assessment
(30)   Based on the above market definitions, the overlaps between the Parties' activities
       rise to horizontally affected markets only in the UK in the following
       markets/segments: (i) LA, (ii) property LA, (iii) personal property LA, (iv)
       commercial property LA, (v) subsidence LA.
21 See M.8617 – Allianz/LV General Insurance Businesses, M.6957 – IF P&C/Topdanmark and M.6053
   – CVC/Apollo/Brit Insurance.
                                                   6
 ---pagebreak---  ---pagebreak---        will remain sufficient alternative sources of supply in the UK market for LA
       services and its potential sub-segments post-Transaction. 25
(34)   More specifically, regarding the subsidence LA segment, although the
       competitive landscape appears from the above table rather consolidated, with only
       one competitor having a sizeable market share (i.e. Crawford), several players
       have been identified as credible alternative suppliers, including Crawford, but
       also McLarens, Davis, Questgate, Woodgate, Maule, etc. 26
(35)   This is notably due to the fact that players with limited operations in a specific
       market segment, such as subsidence LA, can easily expand their activities in the
       said segment27 and, thus, exert a meaningful competitive constraint on the
       market.
(36)   The market investigation identified the main barrier to expansion in a given
       segment in the need to recruit additional staff and experts.28 In this respect, the
       Commission found that the UK labour legislation enhances the ability of small
       LA players to quickly scale-up their capacity to meet customer demand, for
       example when concluding a large contract with a new customer. In particular, the
       TUPE Regulations29 provide that, when a customer switches to a new service
       provider (or decides to bring the services back in-house), the relevant employees
       working on the concerned service may be transferred with the services to become
       employed by the new service provider.
(37)   The Parties provided several examples of such transfers of employees under the
       TUPE Regulations. For instance, in 2011, RBS Insurance decided to outsource its
       subsidence claims, which resulted in the transfer to Innovation Group of 25-30
       people that had been previously doing LA subsidence in-house at RBS. Similarly
       in 2016, 113 employees were transferred from […] to Sedgwick, following […]
       decision to outsource its entire property and casualty claims and in 2018, 16
       employees have been transferred back from Sedgwick to […] as a result of […]
       decision to partially bring the services back in-house. A competitor also
       specifically referred to a case of TUPE transfer of employees in the subsidence
       LA segment.30
(38)   Third, the market investigation confirmed to a large extent the Notifying Party's
       claim that Sedgwick and Innovation Group are not close competitors. Sedgwick is
       a large, multi-risk integrated LA provider, with a broad LA practice covering
       property but also agriculture, casualty, personal motor and travel, whereas
       Innovation Group is a specialised player focussing primarily on the subsidence
       risk (which accounts for more than [80-100%] of its LA business). According to
       most market participants, in all the affected markets/segments, including
       subsidence LA, Sedgwick's closest competitor is Crawford, another multi-risk LA
25 See replies to question 23 of questionnaire Q1 to customers.
26 See replies to question 10 of questionnaire Q2 to competitors and replies to questions 4 and 16 of
   questionnaire Q1 to customers.
27 See replies to questions 4 and 5 of questionnaire Q2 to competitors.
28 See replies to questions 4 and 5 of questionnaire Q2 to competitors.
29 Transfer of Undertakings (Protection of Employment) Regulations 2006 as amended by the Collective
   Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations
   2014 (“TUPE”).
30 See replies to question 6.1 of questionnaire Q2 to competitors.
                                                        8
 ---pagebreak---        provider. Regarding Innovation Group, the results are more mixed, with both
       Sedgwick and Crawford being mentioned as close competitors to Innovation
       Group.31
(39)   Fourth, LA services are mainly provided to large insurance companies, which are
       sophisticated customers with significant countervailing buyer power and the
       possibility to discipline attempts to increase prices. The Commission found that
       the customer-base is rather consolidated, with a limited number of large
       customers representing a high proportion of the UK demand for LA services. 32
       These large insurance companies generally award LA services in two ways: either
       (i) they organise a tender or request for quotes to build a panel of approved LA
       providers,33 or (ii) they directly nominate a LA provider.34
(40)   The market investigation confirmed the Parties' claim that the membership to a
       panel does not provide a guarantee of work. Customers can decide on the
       allocation of work among panel members and can even decide to work with LA
       service providers outside of the panel,35 creating thus additional competition for
       the panel members. The market investigation also revealed that prices differ
       between panel members and can evolve over time (both decrease and increase,
       depending on who initiates the negotiation and whether additional services are
       provided by the LA provider).36 It follows that LA providers compete not only for
       (i) a position on the panel but also for (ii) the allocation of work within the panel.
       This enables customers to push down prices when the panel membership is
       negotiated but also afterwards by reallocating work among panel members or by
       using external LA providers. These competitive dynamics tend to confirm that the
       Parties' ability to raise prices post-Transaction would be rather limited.
(41)   The Commission also notes that customers indicated that the size of loss adjusters
       is irrelevant to become a panel member if the LA has the necessary expertise
       sought by the insurer.37 This corroborates the Parties’ statement that even small
       LA providers exert competitive pressure on the Parties.
(42)   Fifth, the market investigation confirmed the Parties' claims that customers can
       easily and swiftly switch LA providers due to (i) the use of panels of service
       providers, which allows customers to easily re-allocate panel work and/or add
       additional providers, and (ii) the transfer of relevant employees under the UK’s
       TUPE Regulations (see above paragraphs 35-36 and 38-40). Therefore, customers
       have a large degree of freedom to decide which company they want to appoint for
       specific LA claims.
31 See replies to question 12 of questionnaire Q2 to competitors and question 18 to questionnaire Q1 to
   customers.
32 See replies to question 17 of questionnaire Q2 to competitors.
33 As previously explained, a panel is a business arrangement whereby a customer, generally an insurer,
   enters into contracts with a fixed number of suppliers to perform certain LA work that it has decided to
   outsource to third party service providers (see M.8764 – Sedgwick/Cunningham Lindsey, para. 30).
34 See replies to question19 of questionnaire Q2 to competitors and questions 6 and 10 of questionnaire
   Q1 to customers.
35 See replies to questions 26 of questionnaire Q2 to competitors and questions 14 and 15 of
   questionnaire Q1 to customers.
36 See replies to questions 23 to 25 of questionnaire Q2 to competitors and question 15 of questionnaire
   Q1 to customers.
37 See replies to questions 11 and 12 of questionnaire Q1 to customers.
                                                        9
 ---pagebreak--- (43)    Finally, the Commission notes that most customers and competitors consider that
        the Transaction will have a limited or no impact on the UK LA markets and its
        potential sub-segments. For instance, some customers indicated that the
        Transaction is unlikely to have any adverse effects on competition since there are
        "enough providers" on the market and "the parties’ activities appear
        complementary".38
(44)    Based on the above considerations, the Commission concludes that the
        Transaction does not raise serious doubts as to its compatibility with the internal
        market regarding the provision of LA services (and potential sub-segments) in the
        UK.
     5.2.   Vertical relationships
(45)    As previously indicated, PIB (a Carlyle portfolio company) is an insurance broker
        operating mostly in the UK, but also in Ireland through its subsidiary Citynet.
(46)    The Notifying Party claims that there is no direct vertical relationship between the
        provision of TPA and LA services by Sedgwick (upstream) and the provision of
        insurance brokerage by PIB (downstream). It is argued that PIB is a mere
        intermediary between insurers and TPA/ LA providers and that insurers have the
        ultimate control over which TPA/LA providers they do business with. However,
        the Parties also acknowledged that, in some cases, in Ireland, PIB may
        recommend TPA/LA suppliers to insurers and may also appoint them on behalf of
        the insurers (subject to the insurer's prior authorisation).39 Therefore, the
        Commission considers that a direct vertical relationship between the Target and
        PIB cannot be excluded.40
(47)    The above vertical relationship gives rise to affected markets since Sedgwick's
        market shares exceed 30% in some upstream TPA and LA markets/segments in
        Ireland and in the UK. However, in the downstream insurance distribution
        markets (and potential sub-segments), PIB's market shares are negligible, i.e.
        below [0-5]%, under any plausible market definition, both in the UK and Ireland.
(48)    In light of PIB's de minimis share in the downstream markets/segments, the
        Commission considers that the Transaction does not raise any risks of input or
        customer foreclosure. First, the implementation of an input foreclosure strategy,
        where the Target would only offer its services to insurance companies that buy
        PIB’s broker services, excluding thus [90-100]% of Sedgwick's potential
        customers, would not be profitable and would be unrealistic. Second, the demand
        that could be potentially be foreclosed is marginal.
(49)    In view of the foregoing, the Commission concludes that the notified
        concentration does not raise serious doubts as to its compatibility with the internal
        market in relation to the vertical link between the provision of TPA and LA
38 See replies to questions 27 to 29 of questionnaire Q2 to competitors and replies to question 22 to 24 of
   questionnaire Q1 to customers.
39 See Form CO, para. 287.
40 The Parties indicated in the UK, PIB does not provide similar recommendations, or appoint TPA or
   LA suppliers on behalf of its customers (see Form CO, footnote 127). Therefore, a direct vertical
   relationship between the Target and PIB is more hypothetical.
                                                       10
 ---pagebreak---      services (upstream) and the insurance distribution (downstream) in Ireland and in
     the UK.
6.   CONCLUSION
(50) For the above reasons, the European Commission has decided not to oppose the
     notified operation and to declare it compatible with the internal market and with
     the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of
     the Merger Regulation and Article 57 of the EEA Agreement.
                                                   For the Commission
                                                   (Signed)
                                                   Margrethe VESTAGER
                                                   Member of the Commission
                                            11