Insurance Auto Auctions, Inc.

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Insurance Auto Auctions, Inc.

850 E. Algonquin Road
Suite 100
Schaumburg, Illinois 60173
U.S.A.
(847) 705–9550
Fax: (847) 839–3678
Web site: http://www.iaai.com

Public Company
Incorporated: 1982 as Los Angeles Auto Salvage
Employees: 630
Sales: $281.9 million (1996)
Stock Exchanges: NASDAQ
SICs: 5521 Motor Vehicle Dealers (Used Only)

With operations throughout the United States, Insurance Auto Auctions, Inc. (IAA) is one of the auto salvage industry’s top chains. The company was among the first to conceive of and undertake industry consolidation through acquisition, expanding from five branches with an annual vehicle volume of 30,000 units in 1991, to 46 locations and 443,000 vehicles per year in 1996. Fueled by well over a dozen acquisitions, lAA’s sales increased from $38 million in 1990 to almost $282 million by 1996, catapulting the company to a leading role in its highly fragmented industry. Though it boasted top dollar and unit volume, IAA lagged chief rival Copart, Inc. in terms of number of outlets and profitability. In fact, lAA’s net income was on a downward trend in the mid-1990s, declining from nearly $11 million in 1994 to just over $3 million in 1996.

Founder and longtime CEO Bradley Scott relinquished day-to-day leadership of the company in March 1996, but continued to serve as chairman of the board. His successor, Jim Alampi, was recruited from a chemical distribution company. Scott’s retirement capped a half-decade of turnover in lAA’s upper echelon; as of 1996, all but three of the company’s top eleven executives joined the chain after its 1991 initial public stock offering. Around the same time, IAA reorganized into three geographic divisions and moved its headquarters from Southern California to a suburb of Chicago, Illinois.

The Auto Salvage Industry

Bradley Sterling Scott established the company in 1982 as Los Angeles Auto Salvage, a one-acre auto pool in Van Nuys. At that time, most of the country’s auto salvage operations fit with the popular image of a “junkyard”—heaps of vehicles in varying states of ruin waiting for auction by disorganized managers—an inefficient concoction ripe for fraud and abuse.

However, behind that rusty veneer lay an industry primed for automation and consolidation. Contrary to popular belief, most facilities lumped under the term “junkyard” are not the final resting place for totalled cars and trucks. In fact, they are intended to be more like car purgatory: a place that sorts the salvageable from the unsalvageable. The former are sold to used car dealers and dismantlers who reincarnate them, and the latter go to scrap dealers who recycle the otherwise useless carcasses. The junkyard is merely the physical manifestation of the industry; its soul is service. Specifically, auto auction yards serve as the nexus between parties that have severely damaged cars to liquidate and those who see “treasure” in this “trash.”

Salvage auto auctioneers like IAA typically obtain their cars from insurance companies looking to recoup their losses on cars that have been totaled in an accident or natural disaster as well as some vehicles that were stolen and recovered after a settlement was made with the insured. Historically, the auctioneer (a.k.a. “auto pool”) makes money on the transaction by charging sellers a flat consignment fee of $50 to $150 per vehicle to cover services like towing, assessment, title processing, and storage. After the sale, buyers often paid for the same services a la carte. But this modus operandi had a serious flaw: it cast auctioneers as disinterested parties to the transaction, with no incentive to obtain the highest price for their primary clients, the insurance companies.

Revolutionizing The Junkyard In The 1980s

In the early 1980s, auto insurers seeking to make underwriting more efficient and cost-effective began to target vehicle salvage as an area with the potential not only to cut costs but possibly enhance revenues. They began to demand better service and higher returns on vehicle salvage. Bradley Scott was one of the country’s few auto salvage operators to recognize that a tidal wave of change was towering over his industry. Instead of being swept away, the 34-year-old Californian decided to grab a surfboard and ride the wave.

Scott started his reform program with the service end of the business, hosting his first live auction one year after starting LA Auto Salvage. He also departed from the traditional flat rate consignment method of transacting business. Scott focused instead on purchasing cars outright from insurance companies and selling them at a profit. The company negotiated exclusive purchase programs with insurance companies. Under these contracts, IAA agreed to pay a predetermined fraction of the actual cash value (ACV) of each car an insurer had to sell. The ACV, in turn, was based on used car prices. This program proved highly profitable throughout the 1980s and into the early 1990s, because the company could count on making more at auction than it had paid out under contract. By 1996 nearly half of lAA’s autos were supplied by Allstate Insurance Co., Farmers Insurance Group, and State Farm Insurance Co.

IAA enticed insurers to join its program with a broad array of cost-cutting and time-saving conveniences. IAA inaugurated its Vehicle Inspection Center program (VIC) in 1988. This service towed totaled cars directly to centralized inspection areas in IAA yards. This plan allowed claims adjusters to inspect vehicles in one centralized location. IAA made this process even easier in the 1990s with a video imaging service. This program sent detailed color images of damaged vehicles to claims offices through a dedicated computer network, thereby allowing claims adjusters to evaluate autos at the desktop. Niche services also set IAA apart from its many competitors. A catastrophe action team stood ready to assist insurance companies in times of heavy demand, and a specialty salvage service concentrated on vehicles like semi-trucks, boats, and recreational vehicles. Over the course of the decade, Scott also pursued geographic expansion, launching three new outlets in California and a fifth in Hawaii by the end of 1990.

Vehicle buyers paid an annual membership fee ($35 in 1991) that entitled them to access lAA’s inventory databases. Scott likened the membership program to the “Price Club” concept in a 1991 interview with National Underwriter Property & Casualty-Risk & Benefits magazine’s Garry Chandler. Member benefits included weekly computerized inventories of lAA’s stock and electronic title processing.

The membership program also allowed IAA to track the buying habits of its customers, a factor that helped the auctioneer target marketing as well as investigate fraud. In 1991, the company inaugurated its “CarCrush” and “TitleTrac” antifraud programs. Though most wrecked vehicles have some intrinsic value, some are so badly damaged that only one tiny bit retains its worth: the vehicle identification number. Auto theft rings often purchase these otherwise useless heaps, steal an identical (but of course operational) vehicle, then apply the totaled car’s VIN and title to the stolen auto. lAA’s “CarCrush” program advised insurance companies to take useless vehicles’ VINs out of circulation by demolishing these total losses. “TitleTrac” monitored buyers’ auto trading habits for telltale signs of unscrupulous deals.

IPO Presages Expansion Via Acquisition

LA Auto Salvage became the first in its industry to make a public stock offering, taking to the equities market as Insurance, Auto Auctions, Inc. at $11 per share in 1991. A second issue raised an additional $23 million in 1993. The proceeds of these offerings helped finance a major acquisition spree and nationwide expansion. Four corporate purchases totaling $20 million added 6 yards in four western states to the company roster in 1992. IAA extended its reach all the way to the East Coast in 1993, investing at least $18.5 million in nine facilities in Arizona, Texas and the Midwest in the process of acquiring four companies. This growth program nearly tripled lAA’s revenues from $60.5 million in 1992 to over $172 million in 1994. Net income more than doubled over the period, from $4.4 million to just shy of $11 million. Investors watched the stock rise from its issue price of $11 in 1991 to a peak of $45.50 in 1993. That year, Montgomery Securities analyst Joseph Holson noted lAA’s “meteoric” earnings and revenue growth in a brief by Business Week’s Gene G. Marcial.

Company Perspectives:

We anticipate and provide the best customer-valued products and services that help solve business issues and optimize our customers’ return and profitability on salvage. At IAA, we pride ourselves on being a leading provider of automobile salvage services. For us, the key element is services. We go beyond simply buying and selling vehicles to developing and delivering services geared to provide insight to and resolutions for our customers’ business problems. IAA’s innovative services are instrumental in all areas of business—including information, financial and operations management—and we share our extensive knowledge and expertise within the industry. Whether our customer is an insurance company or a salvage buyer, as a market-driven operation, IAA enables its customers to reap the rewards of proceeds from the disposition and utilization of salvaged vehicles. After nearly 15 years in the vehicle salvage business, we understand what it takes for our customers to turn a profit and provide important opportunities for them to do so through mutually beneficial initiatives and solutions.

Sharp Profit Decline an Indication of Management Turnover

IAA hit a king-sized speed bump mid-decade, when used car prices—upon which lAA’s purchase price for wrecked autos was based—began to rise rapidly. This would not have been a problem had auction prices grown in line with the general increase. But in fact, lAA’s per-car pay-outs increased as much as 24 percent from the beginning of 1992 to the end of 1994, while auction values barely budged. The squeeze soon showed up on lAA’s bottom line. Though revenues increased from $172 million in 1994 to nearly $282 million in 1996, net income plunged more than 70 percent, from $11 million to about $3 million. Heretofore upbeat Wall Streeters abandoned the stock, which plummeted to $6.50 per share late in 1995 before recovering to about $11 in the third quarter of 1997.

In the meantime, competition with Copart for key acquisitions had driven up asking prices to the point that in some cases, the creation of “greenfield” yards made economic sense. That year, IAA established three start-up facilities and purchased four companies. Acquisitions returned to the fore in 1995, when the company fleshed out its coverage of the Midwest and East Coast.

In March 1996, founder Bradley Scott acknowledged that “The skills required to take this company to the next level—in things like information technology and human resources and financial management—were different from the skills I have.” Scott handed ultimate managerial responsibility to outsider James Alampi, who continued a managerial housecleaning that had begun when IAA went public in 1991. The new executive team was young; at 50, Alampi himself was the oldest. He brought three executives—CFO Linda Larrabee, controller Stephen L. Green, and information systems vice-president Charles Rice—with him from his previous employer, Van Waters & Rogers Inc. Whether these professionals would be able to transfer their experience in the chemical distribution industry to the auto salvage business remained to be seen.

Under Alampi, IAA checked its growth in 1996, adding only two Midwestern facilities. Revenues for the first nine months of 1997 slid ten percent from the comparable period in 1996 as IAA shifted from the purchase strategy to a concentration on consignment. The company also worked to renegotiate more favorable purchase agreements with insurers—especially Allstate, which owned a minority stake in the salvage auto auctioneer.